LIBRARY 

OF  THE 

UNIVERSITY  OF  CALIFORNIA. 

Class 


A  TREATISE  ON  THE 

FEDERAL  CORPORATION 
TAX  LAW  OF  1909 


A   TEEATISE 

ON    THE 

FEDERAL 

CORPORATION   TAX  LAW 
OF  1909 

TOGETHER  WITH  APPENDICES 

CONTAINING  THE   ACT   OF   CONGRESS   AND   TREASURY 

REGULATIONS   WITH   ANNOTATIONS   AND 

EXPLANATIONS   AND   FORMS 

OF   RETURNS 

By 
ARTHUR  W.  MACHEN,  JB., 

OF  THE  BALTIMORE  BAB 
AUTHOR  OP  "  THE  MODERN  LAW  OP  CORPORATIONS  " 


BOSTON 

LITTLE,  BROWN,  AND  COMPANY 
1910 


Copyright,  1910, 
BY  ARTHUR  W.  MACHEN,  JB. 


All  rights  reserved 


^printer* 
S.  J.  PARKHILL  <fe  Co.,  BOSTON,  U.  S.  A. 


PREFACE 

THE  publication  of  a  commentary  upon  the  new 
federal  tax  on  corporations,  companies  and  associa- 
tions needs  no  apology.  Upon  a  matter  of  such 
importance  as  this  new  tax  law,  corporations 
should  certainly  know  their  rights,  —  even  those 
which  they  may  not,  knowing,  dare  maintain.  All 
business  corporations  throughout  the  country  will 
be  called  upon  within  the  next  few  weeks  to  make 
returns  under  this  statute;  and  in  order  to  do  so 
intelligently  and  without  risk  to  themselves,  they 
and  their  counsel  must  ascertain  their  rights  and 
liabilities  much  more  thoroughly  than  can  be  done 
by  a  mere  perusal  of  the  Act  of  Congress.  In  order, 
however,  to  be  of  assistance  at  this  juncture,  it  is 
necessary  that  a  treatise  should  be  published 
speedily.  Time  is  of  the  essence.  The  indulgence 
of  the  reader  is,  therefore,  asked  for  any  defects  in 
this  book  which  but  for  the  necessity  of  despatch  in 
its  preparation  and  publication  the  author  might 
have  been  able  to  remedy. 

Every  energy  has  been  bent  to  the  one  object  of 
furnishing  practical  assistance  in  what  may  not 
inappropriately  be  described  as  an  emergency. 
The  aim  has  been  to  explain  whatever  may  be  cer- 


236362 


VI  PREFACE. 

tain  in  respect  to  this  statute,  and  to  suggest  debat- 
able questions.  The  decisions  under  former  federal 
statutes  taxing  incomes,  or  the  earnings  of  corpora- 
tions, as  well  as  relevant  decisions  under  the  English 
income-tax  laws,  will  be  found,  it  is  hoped,  to  be 
fully  collected.  It  is  believed,  therefore,  that  the 
book  is  more  than  a  mere  "  annotated  -edition  "  of 
the  Act  of  Congress.  In  respect  to  points  of  general 
law  —  particularly  of  general  corporation  law  — 
which  have  a  bearing  upon  the  new  federal  statute, 
it  has  seemed  better  usually  to  refer  to  text-books 
where  those  questions  are  discussed  or  to  encyclo- 
pedias where  full  citations  of  authorities  may  be 
found,  rather  than  to  set  out  the  authorities  in  full 
with  a  consequent  unreasonable  increase  in  the  size 
of  the  volume  and  of  a  protracted  delay  in  its 
publication. 

A.  W.  M.,  JR. 
BALTIMORE,  January  17th,  1910. 


TABLE  OF  CONTENTS 

PAGE 

TABLE  OF  CASES ix 

TABLE  OF  FEDERAL  STATUTES  CITED       ....  xxiii 


CHAPTER   I 
1-3.    INTRODUCTORY 


CHAPTER  II 
4-14.     WHAT  is  THE  TAX  ON  . 


CHAPTER  III 

§§    15-29.    WHAT  COMPANIES  ARE  SUBJECT  TO  THE 

TAX  17 


CHAPTER  IV 

(    30-84.    How  THE  TAXABLE  INCOME    is    CALCU- 
LATED     37 

CHAPTER  V 
1 85-118.    THE  RETURN 103 

CHAPTER  VI 
\  119-131.    THE  ASSESSMENT  AND  COLLECTION       .     139 


Viil  CONTENTS. 

PAGE 

CHAPTER  VII 
§§  132-138.     REMEDIES 158 

CHAPTER  VIII 
§§  139-149.    CONSTITUTIONALITY 170 

APPENDIX  I 
TEXT  OP  THE  ACT  OF  CONGRESS 185 

APPENDIX  II 

REGULATIONS      OP     THE     TREASURY    DEPARTMENT, 

WITH  ANNOTATIONS 201 

APPENDIX  III 

FORMS  OF  RETURNS 227 

INDEX 241 


TABLE  OF  CASES  CITED 

[References  are  to  sections] 

SECTION 

Adams  Express  Co.  v.  Ohio,  166  U.  S.  185;   17  Sup. 

Ct.  Rep.  604 5 

Agnew  v.  Haymes,  141  Fed.  631 137 

Alexandria  Canal  Co.  v.  The  District,  5  Mackey  (D.  C.) 

376 134 

Alianza  Co.  v.  Bell,  (1906)  A.  C.  18  .  .  .  .  53,  57 

American  Sugar  Ref.  Co.  v.  Rutan,  123  Fed.  979  .  34,^43 

Anthony  v.  Caswell,  15  R.  I.  159;  1  Atl.  290  .  .  38 
Apthorpe  v.  Peter  Schoenhofer  Brewing  Co.,  80  L.  T. 

395 34 

Armour  v.  Roberts,  151  Fed.  846 137 

Assessor  v.  Osbornes,  9  Wall.  567,  574  .  ...  137 
Attorney-General  v.  Till,  54  Sol.  J.  132;  (1909)  1  K.  B. 

694 105 

Audenreid  v.  East  Coast  Milling  Co.,  124  Fed.  697  .  28 

Bailey  v.  Clark,  21  Wall.  284 78 

Bailey  v.  Railroad  Co.,  22  Wall.  604  ....  74 
Bailey  v.  Railroad  Co.,  106  U.  S.  109;  1  Sup.  Ct.  Rep. 

62 74 

Baltzell  v.  Church  Home  &  Infirmary,  110  Md.  244; 

73  Atl.  151 26 

Bank  v.  Tennessee,  104  U.  S.  493 43 

Bank  for  Savings  v.  Collector,  3  Wall.  295  .  .  .  67 
Bartholomay  Brewing  Co.  v.  Wyatt,  (1893)  2  Q.  B.  499  37 

Blacklock  v.  United  States,  208  U.  S.  75  .  .  .  125 

Boardman  v.  McClure  Co.,  123  Fed.  614  .  .  .  28 


X  TABLE  OF   CASES   CITED. 

[References  are  to  sections] 

SECTION 

Borough  of  Carlisle  v.  Marshall,  36  Pa.  St.  397     .       .  38 

Boske  v.  Commingore,  177  U.  S.  459      .        .        .        .  128 
Bradfield  v.  Roberts,  175  U.  S.  291;   20  Sup.  Ct.  Rep. 

121 18 

Brampton  v.  Beddoe,  13  C.  B.  N.  S.  538        ...  28 

Braun  v.  Sauerwein,  10  Wall.  218    .        .        .        .        .  137 

Brickwood  &  Co.  v.  Reynolds,  (1898)  1  Q.  B.  95    .        .  47 

Brown  v.  Watt,  50  J.  P.  583 81 

Burrough  v.  Abel,  105  Fed.  366 137 

Butterworth  v.  Hoe,  112  U.  S.  50;   5  Sup.  Ct.  Rep.  25  134 

Caesar  v.  Capell,  83  Fed.  403 28 

California  v.  Central  Pac.  R.  R.  Co.,   127  U.  S.  1;   8 

Sup.  Ct.  Rep.  1073        ......  145 

Carey  v.  Curtis,  3  How.  236 137 

Carey  v.  Savings  Union,  22  Wall.  38       ....  74 

Carrick  v.  Lamar,  116  U.  S.  423;   6  Sup.  Ct.  Rep.  424  134 

Central  of  Ga.  Ry.  Co.  v.  Wright,  207  U.  S.  127  .        .  107 
Central  Nat.  Bank  v.  United  States,  137  U.  S.  355;  11 

Sup.  Ct.  Rep.  126 68 

Central  Pac.  R.  R.  Co.  v.  California,  162  U.  S.  91;   16 

Sup.  Ct.  Rep.  766 145 

Central  R.  R.  Co.  v.  Collins,  40  Ga.  582         ...  47 

Central  Trust  Co.  v.  Treat,  171  Fed.  301        ...  43 

Chadwick,  Re,  1  Lowell,  439 108 

Chadwick  v.  Pearl  Life  Ins.  Co.,  (1905)  2  K.  B.  507  .  36 

Chamberlain  v.  Anthony,  21  R.  I.  331    .        .        .        .  90 

Charleston  Nat.  Bank  v.  Melton,  171  Fed.  743      .       .  40 

Cheatham  v.  United  States,  92  U.  S.  85         .        .       .  137 
Cheeseborough  v.  United  States,  192  U.  S.  253;   24 

Sup.  Ct.  Rep.  262 137,  137,  138 

Chicago  Distilling  Co.  v.  Stone,  140  U.  S.  647;  11  Sup. 

Ct.  Rep.  862 137 

Chicago,  etc.,  R.  R.  Co.  v.  Page,  1  Biss.  461  .        .       .  74 
Christie-Street  Commission  Co.  v.  United  States,  136 

Fed.  326 137,137 


TABLE   OF   CASES   CITED.  xi 
[References  are  to  sections] 

SECTION 

City  of  Lexington  v.  Fishback's  Trustee,  60  S.  W.  727; 

22  Ky.  Law.  Rep.  1392 38 

Clerical,  etc.,  Ass.  Soc.  v.  Carter,  22  Q.  B.  D.  444  .  43 

Cleveland  Trust  Co.  v.  Lauder,  19  Oh.  Circ.  Ct.  217  .  40 

Clews  v.  Woodstock  Iron  Co.,  44  Fed.  31  ...  28 

Clinkenbeard  v.  United  States,  21  Wall.  65  ...  137 

Colgate  v.  U.  S.  Leather  Co.,  72  Atl.  126  (N.  J.  Eq.)  .  18 

Colquhoun  v.  Brooks,  14  A.  C.  493  ....  37 
Coltness  Iron  Co.  v.  Black,  6  A.  C.  315  .  .  .  .  53,  57 
Commissioners  v.  Buckner,  48  Fed.  533  .  .  137,  137,  137 
Commissioners  for  Income  Tax  v.  Pemsel,  (1891)  A.  C. 

531 26 

Commissioner  for  Taxes  v.  Eastern  Extension  etc.  Tel. 

Co.,  (1906)  A.  C.  526 77 

Commissioners  of  Taxation  v.  Kirk,  (1900)  A.  C.  588  77 

Commissioner  of  Patents  v.  Whitely,  4  Wall.  522  .  134 
Commonwealth  v.  Kelley,  177  Mass.  221;  58  N.  E.  691  17 
Commonwealth  v.  Lancaster  Sav.  Bank,  123  Mass.  493  29 
Commonwealth  v.  Provident  Bicycle  Ass'n.,  178  Pa. 

636;  36  L.  R.  A.,  589;  36  Atl.  197  ....  20 
Cooper  Mfg.  Co.  v.  Ferguson,  113  U.  S.  727;  5  Sup. 

Ct.  Rep.  739    .........  28 

Cotton  Press  Co.  v.  Collector,  1  Woods,  296  .  .  .  138 

County  of  Greene  v.  Daniel,  102  U.  S.  187,  195  .  .  134 
County  of  Ramsay  v.  Chicago,  etc.,  Ry.  Co.,  33  Minn. 

537;  24  N.  W.  313 .  .  43 

County  of  Todd  v.  St.  Paul,  etc.,  Ry.  Co.,  38  Minn.  163; 

36  N.  W.  109 43,  43 

Crown  Cork  &  Seal  Co.  v.  State,  40  Atl.  1074;  87  Md. 

687;  53  L.  R.  A.  417 40 

Cummings  v.  Akron  Cement,  etc.,  Co.,  6  Blatchf.  509, 

511 17 

Davenport  v.  County  of  Dodge,  105  U.  S.  237      .       .  134 

Davis  &  Rankin,  etc.,  Co.  v.  Dix,  64  Fed.  406  ..  28 
DeBary  v.  Dunne,  162  Fed.  961  ....  137,  137 


xii  TABLE  OF  CASES  CITED. 

[References  are  to  sections] 

SECTION 

Decatur  v.  Paulding,  14  Pet.  497 134 

Delage  v.  Nugget  Polish  Co.,  92  L.  T.  682  ...  36 
Delaware  R.  Co.  v.  Prettyman,  7  Fed.  Cas.  408  .  133, 136 
Delaware  Railroad  Tax,  Re,  18  Wall.  206  ...  4 
DeLima  v.  Bidwell,  182  U.  S.  1;  21  Sup.  Ct.  Rep.  743  27 
Detroit  v.  Lewis,  109  Mich.  155;  66  N.  W.  958;  32 

L.  R.  A.  439 38 

Dollar  Sav.  Bk.  v.  United  States,  19  Wall.  227,  240  114,  126 
Dooley  v.  United  States,  182  U.  S.  222;  21  Sup.  Ct. 

Rep.  762 27,  137 

Dooley  v.  United  States,  183  U.  S.  151;  22  Sup.  Ct. 

Rep.  62 27 

Duke  of  Norfolk  v.  Lamarque,  24  Q.  B.  D.  485  .  .  47 

East  Indian  Ry.  Co.  v.  Secretary  of  State,  (1905)  2 

K.  B.  413 36 

Eastern  Bldg.  Assn.  v.  Bedford,  88  Fed.  7  ...  28 
Edison  El.  111.  Co.  v.  United  States,  38  Ct.  of  Cl.  208  .  138 
Elliott  v.  Swartwout,  10  Pet.  137  ....  137,  137 
Empire  Milling,  etc.,  Co.  v.  Tombstone  Mill,  etc.,  Co. 

100  Fed.  910 28,28 

Equitable  Life  Ass.  Soc.  v.  Bishop  (1900)  1  Q.  B.  177        20 

Ericksen  v.  Last,  8  Q.  B.  D.  414 77 

Erie  Ry.  Co.  v.  Pennsylvania,  21  Wall.  492-497  .  .  28 
Erskine  v.  Hohnbach,  14  Wall.  613  ...  136,  136 
Erskine  v.  Van  Arsdale,  15  Wall.  75  ...  137,  137 
Ewing  v.  Burnet,  11  Pet.  41,  54 17 

Farrell  v.  United  States,  167  Fed.  639  .  .  .  114,  137 

Foley  v.  Fletcher,  3  H.  &  N.  769 36 

Ford  v.  Delta,  etc.,  Co.,  164  U.  S.  662,  674;  17  Sup. 

Ct.  Rep.  230 17,43,69 

Forder  v.  Handyside,  1  Ex.  D.  233  ....  53,  57 
Fourteen  Diamond  Rings,  183  U.  S.  176;  22  Sup.  Ct. 

Rep.  59     . 27 


TABLE  OF   CASES   CITED.  xiii 

[References  are  to  sections] 

SECTION 

Frawley,  Bundy  &  Wilcox  v.  Pennsylvania  Casualty 

Co.,  124  Fed.  259 28,  28 

Gaines  v.  Thompson,  7  Wall.  347 134 

Galveston,  Harrisburg,  etc.,  Ry.  Co.  v.  Texas,  210 

U.  S.  217 6,  6 

General  Accident,  etc.,  Corp.  v.  McGowan  (1908)  A.  C. 

207 58 

Gibbons  v.  Mahon,  136  U.  S.  549;  10  Sup.  Ct.  Rep.  1057  34 
Gilchrist  v.  Helena,  etc.,  R.  Co.,  47  Fed.  593  .  .  28 
Gillatt  v.  Colquhoun,  33  W.  R.  258  ....  52,  57 

Gleason  v.  McKay,  134  Mass.  419 11 

Good  Hope  Co.  v.  Railway  Barb  Fencing  Co.,  22  Fed. 

635 28 

Grainger  v.  Gough  (1896),  A.  C.  325  .  .  .  28,  28,  28 
Gramophone  &  Typewriter  v.  Stanley,  (1908)  2  K.  B.  89  34,  43 
Grant  v.  Hartford,  etc.,  R.  R.  Co.,  93  U.  S.  225  .  .  31,  47 
Gray  v.  Darlington,  15  Wall.  63,  66  ...  31,  35,  35 
Greene  v.  Mumford,  4  R.  I.  313;  319-320  ...  38 
Gregg  v.  Sanford,  65  Fed.  151;  12  C.  C.  A.  525  .  .  16 
Gresham  Life  Ass.  Soc.  v.  Bishop,  (1902)  A.  C.  287  .  37,  37 
Gresham  Life  Ass.  Soc.  v.  Styles,  (1892)  A.  C.  309  .  58 
Grove  v.  Young  Men's  Christian  Assn.,  88  L.  T.  696  .  26 
Gulf,  etc.,  R.  R.  Co.  v.  Hewes,  183  U.  S.  66;  22  Sup. 

Ct.  Rep.  26 11 

Guthrie  v.  Pittsburg,  etc.,  Ry.  Co.,  138  Pa.  433  .  .  38 

Haight  &  Freese  Co.  v.  McCoach,  135  Fed.  894    .       .  137 

Hall,  John  Junior  &  Co.  v.  Rickman,  (1906)  1  K.  B.  311  57 

Hamilton  Co.  v.  Massachusetts,  6  Wall.  632  .        .        .  11, 11 

Hammock  v.  Farmers'  L.  &  T.  Co.,  105  U.  S.  77          .  17 

Hazeltine  v.  Mississippi  Fire  Ins.  Co.,  55  Fed.  743        .  28 

Head-Money  Cases,  112  U.  S.  580;  5  Sup.  Ct.  Rep.  247  146 

Hercules  Mut.  Life  Ass.  Soc.,  12  Fed:  Cas.  12       ..  20 

Herold  v.  Kahn,  159  Fed.  608;  86  C,  C.  A.  598    .       .  137 


Xiv  TABLE  OF  CASES  CITED. 

[References  are  to  sections] 

SECTION 

Herold  v.  Kahn,  163  Fed.  947 .  137 

Herold  v.  Shanley,  146  Fed.  20 137 

Hesketh  v.  Bray,  21  Q.  B.  D.  444 47 

Hicks  v.  James,  48  Fed.  542 137 

Holy  Trinity  Church  v.  United  States,  143  U.  S.  457, 

462 3 

Home  Insurance  Co.  v.  New  York,  134  U.  S.  594;  10 

Sup.  Ct.  Rep.  593 40 

Honolulu  Transit  Co.  v.  Wilder,  211  U.  S.  137,  142  .  5, 11 

Hubbard  v.  Collector,  12  Wall.  1 137 

Hubbard  v.  Kelley,  8  W.  Va.  46  .  .  .  .  .  137 

Hunter  v.  Rex,  (1904)  A.  C.  161 49 

Illinois  Central  R.  R.   Co.  v.  Decatur,  147  U.  S.  190; 

13  Sup.  Ct.  Rep.  293 69 

Illinois  Central  R.  R.  Co.  v.  Irwin,  72  111.  452  .  .  43 

Imperial  Fire  Ins.  Co.  v.  Wilson,  35  L.  T.  N.  S.,  271  58 

Independent  Ins.  Co.,  13  Fed.  Cas.  13  ....  20 
Inhabitants  of  Worcester  v.  Western  Railroad  Co.,  4 

Met.  564 43 

Jackson  Lumber  Co.  v.  McCrimmon,  164  Fed.  759       .  129 

James  v.  Hicks,  110  U.  S.  272;  4  Sup.  Ct.  Rep.  6        .  137 

Kearns,  In  Re,  64  Fed.  481 127 

Kendall  v.  Stokes,  3  How.  87 134 

Kendall  v.  United  States,  12  Pet.  524  ....  134 

King  v.  United  States,  99  U.  S.  229  ....  114 
King's  County  Sav.  Institution  v.  Blair,  116  U.  S.  200, 

205;  6  Sup.  Ct.  Rep.  353  ...  137, 137,  137, 138 
Kinney,  Re,  102  Fed.  468  ....  109,  110, 127 

Kinney  v.  Conant,  166  Fed.  720 137 

Knowlton  v.  Moore,  178  U.  S.  41;  20  Sup.  Ct.  Rep. 

747  ....  - 146,146 

Kodak,  Ltd.  v.  Clark,  (1903)  1  K.  B.  505  ...  34 


TABLE  OF  CASES  CITED.  XV 

[References  are  to  sections] 

SECTION 

Lamar  Water,  etc.,  Co.  v.  Lamar,  32  L.  R.  A.  157, 165; 

128  Mo.  188;  26  S.  W.  1025;  31  S.  W.  756  .  .  69 

Last  v.  London  Ass.  Co.,  10  A.  C.  438  .  .  .  .  20 

Latrobe  v.  Mayor,  etc.,  of  Baltimore,  19  Md.  13  ..  38 

Lawless  v.  Sullivan,  6  A.  C.  373 33,  53 

Leather  Mnfrs.  Nat.  Bank  v.  Treat,  128  Fed.  262;  62 

C.  C.  A.  644 78 

Lincoln  v.  United  States,  197  U.  S.  419;  25  Sup.  Ct. 

Rep.  455 .  27 

Little  Miami,  etc.,  R.  R.  Co.  v.  United  States,  108  U.  S. 

277;  2  Sup.  Ct.  Rep.  627  53,  53, 113,  114, 114, 122,  126 

Llewellyn's  Appeal,  103  Pa.  458 47 

Londoner  v.  Denver,  210  U.  S.  373  ....  107 
Lovell  &  Christmas  v.  Commissioners  of  Texas,  (1908) 

A.C.46 28,28,77 

McClain  v.  Pennsylvania  Co.,  108  Fed.  618;  47  C.  C.  A. 

529 137 

McClung  v.  Silliman,  2  Wheat.  369  ....  134 

McClung  v.  Silliman,  6  Wheat.  598  ....  134 
McCrary  v.  United  States,  195  U.  S.  27;  24  Sup.  Ct. 

Rep.  759 146 

McCulloch  v.  Maryland,  4  Wheat.  316  ....  145 
McDonald  v.  Mass.  Gen.  Hospital,  120  Mass.  432;  21 

Am.  Rep.  529 26 

McGowan  v.  Larsen,  66  Fed.  910;  14  C.  C.  A.  178  .  121 

Mclntire  v.  Wood,  7  Cranch,  504 134 

McLeod  v.  Lincoln  Medical  College,  (Neb.)  96  N.  W. 

265 26 

Mackay  v.  San  Francisco,  128  Cal.  678;  61  Pac.  382  .  38 

Magee  v.  Denton,  5  Blatchf.  130 37 

Magoun  v.  Illinois  Trust,  etc.,  Co.,  170  U.  S.  283;  18 

Sup.  Rep.  594 146 

Maine  v.  Grand  Trunk  Ry.  Co.,  142  U.  S.  217;  12  Sup. 

Ct.  Rep.  121,  163 10,  142 

Maudell  v.  Pierce,  3  Cliff.  135 29 


TABLE  OF  CASES  CITED. 
[References  are  to  sections] 

SECTION 

Manhattan  Co.  v.  Blake,  148  U.  S.  412;    13  Sup.  Ct. 

Rep.  640 40 

Mansfield  v.  Excelsior  Refining  Co.,  135  U.  S.  326  .  125 
Marbury  v.  Madison,  1  Cranch,  137  .  .  .  134,  134 
Marsh  v.  Sanders,  110  La.  726;  34  So.  752  .  .  .  116 
Memphis  City  v.  Dean,  8  Wall.  64,  73  .  .  .  .  133 
Merchants  Ins.  Co.  v.  McCartney,  1  Lowell,  447  .  .  34,  39 
Mersey  Docks  v.  Lucas,  8  A.  C.  891  .  .  .  .  17 

Miles  v.  Johnson,  59  Fed.  38 133 

Missouri  River,  etc.,  Co.  v.  United  States,  19  Fed.  66  126 
Morrill  v.  Jones,  106  U.  S.  466;  1  Sup.  Ct.  Rep.  423  .  90 
Murdoch  v.  Ward,  178  U.  S.  139;  20  Sup.  Ct.  Rep.  775  40 
Mutual  Life  Ins.  Co.  v.  Speatley,  172  U.  S.  602  .  .  28,  28 

National  Union  v.  Marlow,  74  Fed.  775;  21  C.  C.  A.  89  24 
New  York,  Lake  Erie,  etc.,  Co.  v.  Pennsylvania,  158 

U.S.  431;  15  Sup.  Ct.  Rep.  900 40 

New  York  Life  Ins.  Co.  v.  Styles,  14  A.  C.  381  .  .  20 
New  York  State  v.  Roberts,  171  U.  S.  658;  19  Sup.  Ct. 

Rep.  58 4, 78 

Norton  v.  Atchison,  etc.,  R.  Co.,  61  Fed.  618  .  .  28 

Oakland  Sugar  Mill  Co.  v.  Wolf  Co.,  118  Fed.  239; 

55  C.  C.  A.  193 28 

Pacific  Ins.  Co.  v.  Soule,  7  Wall.  433  ....  142 
Paddington  Burial  Board  v.  Commissioners  of  Inland 

Revenue,  13  Q.  B.  D.  9 26 

Palmer  v.  McMahon,  133  U.  S.  660,  669;  18  Sup.  Ct. 

Rep.  324 107 

Patton  v.  B>-ady,  184  U.  S.  608;  22  Sup.  Ct.  Rep.  493  144,  146 
People  v.  Am.  Bell.  Tel.  Co.,  117  N.  Y.  241;  22  N.  E. 

1057 28,  78,  78 

People  v.  Board  of  Trade,  80  111.  134,  136  ...  17 
People  v.  Campbell,  138  N.  Y.  543;  34  N.  E.  370;  20 

L.  R.  A.  453    .......      28,78,78,78 


TABLE  OF  CASES  CITED.  Xvil 

[References  are  to  sections] 

SECTION 

People  v.  Coleman,  119  N.  Y.  137;   23  N.  E.  488;   7 

L.  R.  A.  407 38 

People  v.  Neff,  34  N.  Y.  App.  Div.  83  .  .  .  .18,  26 
People  v.  Wemple,  117  N.  Y.  136;  6  L.  R.  A.  303; 

22  N.  E.  1046 16 

People  v.  Wemple,  133  N.  Y.  323;  31  N.  E.  238  .  .  78 
People  v.  Wemple,  148  N.  Y.  690;  43  N.  E.  176  .  78,  78 
People  ex  rel.  Devoe  Co.  v.  Roberts,  51  N.  Y.  Ap.  Div. 

77;  64  N.  Y.  Supp.  494 44 

People  ex  rel.  Fort  George  Realty  Co.  v.  Miller,  179 

N.  Y.  49 78 

People  ex  rel.  Niagara,  etc.,  Co.  v.  Roberts,  30  N.  Y. 

App.  Div.  180;  157  N.  Y.  676 78 

People  ex  rel  Singer  Mfg.  Co.  v.  Wemple,  150  N.  Y.  46  78 
People  ex  rel.  Union  Trust  Co.  v.  Coleman,  126  N.  Y. 

433;  27  N.  E.  818;  12  L.  R.  A.  762  .  .  .  .  61 
People  ex  rel.  Wall,  etc.,  Co.  v.  Miller,  181  N.  Y.  328  .  44,  78 
Philadelphia  Contributorship  v.  Commonwealth,  98 

Pa.  48 40,  53 

Philadelphia,  etc.,  S.  S.  Co.  v.  Pennsylvania,  122  U.  S. 

326;  7  Sup.  Ct.  Rep.  1118 11,40 

Plummer  v.  Coler,  178  U.  S.  115;  20  Sup.  Ct.  Rep.  829  4,  40 
Pollock  v.  Farmers'  L.  &  T.  Co.,  157  U.  S.  429;  15  Sup. 

Ct.  Rep.  673;   158  U.  S.  601;   15  Sup.  Ct.  Rep.  912 

.  40,  41,  42,  130,  130,  133,  141,  143,  144,  149 
Pommery  v.  Apthorpe,  56  L.  J.  Q.  B.  155  .  .  .  28 
Ponce  v.  Roman  Catholic  Church,  210  U.  S.  296,  309  .  27 
Powell  v.  United  States,  135  Fed.  881  .  .  .  .  90 
Provident  Inst.  v.  Massachusetts,  6  Wall.  611  .  .  11 

Railroad  v.  Berks  County,  6  Pa.  St.  70  ....  43 

Railroad  Co.  v.  Collector,  100  U.  S.  595         ...  4 

Redding,  Re,  (1897)  1  Ch.  876         .       .       .       .       .  33 

Reid's  Brewery  Co.  v.  Mole,  (1891)  2  Q.  B.  1        .       .  43 

Rex  v.  Special  Commissioner,  98  L.  T.  446    ...  26 

Reynolds  v.  Williams,  4  Bias.  108    .       .       .       .       .  34 


TABLE  OF   CASES   CITED. 
[References  are  to  sections]  . 

SECTION 

Rhymney  Iron  Co.  v.  Fowler,  (1896)  2  Q.  B.  79    .  .         47 

Richardson  v.  Boston,  148  Mass.  508;  20  N.  E.  166  .         38 

Royal  Ins.  Co.  v.  Watson,  (1897)  A.  C.  1       .       .  .         47 

Russell  v.  Town  &  County  Bank,  13  A.  C.  418      .  .  45,  47 


St.  Andrew's  Hospital  v.  Shearsmith,  19  Q.  B.  D.  624  26 

St.  Louis  Bldg.,  etc.,  Ass'n  v.  Lightner,  47  Mo.  393  .  40 

St.  Louis  Breweries  v.  Apthorpe,  79  L.  T.  551  .  .  34 

St.  Louis  Wire-Mill  Co.,  32  Fed.  802  ....  28 
Salt  Lake  City  v.  Hollister,  118  U.  S.  256;  6  Sup.  Ct. 

Rep.  1055 44 

Santa  Clara  Female  Academy  v.  Sullivan,  116  111.  375; 

6  N.  E.  183;  56  Am.  Rep.  776 26,  28 

Schafer  v.  Craft,  144  Fed.  907 127 

Schuylkill  Nav.  Co.  v.  Elliott,  21  Fed.  Cas.  762  .  .  148 
Schwarzchild  v.  Rucker,  143  Fed.  656  .  .  .  137, 137 

Scott  v.  Abbott,  160  Fed.  573 63 

Scottish  Provident  Ass'n  v.  Allan,  (1903)  A.  C.  129  .  33,  37 

Scottish  Union,  etc.,  Ins.  Co.  v.  Bowland,  196  U.  S.  611  78 

Secretary  of  State  v.  Scoble,  (1903)  A.  C.  299  .  .  36 

Selden  v.  Equitable  Trust  Co.,  94  U.  S.  419  .  .  .  67 

Sheffield,  Re,  64  Fed.  833 145 

Sheridan  v.  Allen,  153  Fed.  568;  82  C.  C.  A.  522  .  125 
Sioux  City  &  Pac.  R.  R.  Co.  v.  United  States,  110  U.  S. 

205;  3  Sup.  Ct.  Rep.  565 65 

Smith  v.  Grayson  County,  (Texas)  44  S.  W.  921,  923  .  47 

Snyder  v.  Marks,  109  U.  S.  189;  3  Sup.  Ct.  Rep.  157  .  133 

Society  for  Savings  v.  Coite,  6  Wall.  594  ...  11,  40 
South  Carolina  v.  United  States,  199  U.  S.  437;  26 

Sup.  Ct.  Rep.  110 145 

Southwell  v.  Savill  Bros.,  (1901)  2  K.  B.  349  .  .  47 
Southwestern  R.  R.  Co.  v.  Wright,  116  U.  S.  231;  6 

Sup.  Ct.  Rep.  375 43 

Speer  v.  Colbert,  200  U.  S.  130;  26  Sup.  Ct.  Rep.  201  18 
Spreckels  Sugar  Ref.  Co.  v.  McClain,  192  U.  S.  397;  24 


TABLE  OF   CASES  CITED.  XIX 

[References  are  to  sections] 

SECTION 

Sup.  Ct.  376;   113  Fed.  244;   51  C.  C.  A.  201 

29,  39,  43,  43,  43,  90,  142,  146 

Spreckels  Sugar  Ref.  Co.  v.  McClain,  109  Fed.  76  .  29,  39 
Stanley  v.  Supervisors  of  Albany,  121  U.  S.  535,  550- 

551;  7  Sup.  Ct.  Rep.  1234 137 

State  v.  B.  &  O.  R.  R.  Co.,  48  Md.  49,  80      .        .     43,  43,  43 

State  v.  Collector,  25  N.  J.  Law  Rep.  315  ...  43 
State  v.  Commissioners  of  Mansfield,  23  N.  J.  Law  510; 

57  Am.  Dec.  409-n 43 

State  v.  Taylor,  (111.)  89  N.  E.  271 61 

State  v.  Willard,  77  Minn.  190;  79  N.  W.  829       .        .  38 

Stevens  v.  Bishop,  20  Q.  B.  D.  442          ....  47 

Stockard  v.  Morgan,  185  U.  S.  27;  22  Sup.  Ct.  Rep.  576  6 

Stockdale  v.  Insurance  Co.,  20  Wall.  323        ...  148 

Strong  &  Co.  v.  Woodifield,  (1906)  A.  C.  448  .  .  47,  81 
Stutsman  County  v.  Wallace,  142  U.  S.  293;  12  Sup. 

Ct.  Rep.  297 .  136 

Sullivan  v.  Sheehan,  89  Fed.  247     .       .       .        .  28 

Sully  v.  Attorney-General,  5  H.  &  N.  711      .       .       .  77 

Swigert,  Re,  119  111.  83;  6  N.  E.  469      ....  43 

Tennant  v.  Smith,  (1892)  A.  C.  150        ....  33 

Thatcher  v.  United  States,  15  Blatchf.  15      ..        .  90 

Tischler  v.  Apthorpe,  52  L.  T.  N.  S.  814        ...  28 

Tucker  v.  Ferguson,  22  Wall.  527,  575    ....  42 

Tucker  v.  Grier,  160  Fed.  611;  87  C.  C.  A.  513       .       127,  137 

Turner  v.  Evans,  2  E.  &  B.  512 28 

Tyrrell  v.  Mayor,  etc.,  of  New  York,  159  N.  Y.  239; 

53  N.  E.  1111 17 

United  States  v.  Am.  Bell.  Tel.  Co.,  29  Fed.  17  ..  28 
United  States  v.  Black,  128  U.  S.  40;  9  Sup.  Ct.  Rep. 

12 134,134 

United  States  v.  Elaine,  139  U.  S.  306;  11  Sup.  Ct. 

Rep.  607 134 


XX  TABLE   OF   CASES   CITED. 

[References  are  to  sections] 

SECTION 

United  States  v.  Central  Natl.  Bank,  137  U.  S.  255; 

S.  C.  10  Fed.  612 53,  54 

United  States  v.  Eaton,  144  U.  S.  677  .  .  .  90,  101 
United  States  v.  Fisher,  2  Cranch,  358  ....  3 

United  States  v.  Frost,  25  Fed.  Gas.  1221  ...  37 
United  States  v.  Isham,  17  Wall.  496  ....  17 
United  States  v.  Hyams,  146  Fed.  15  ....  90 
United  States  v.  Lacher,  134  U.  S.  624;  10  Sup.  Ct. 

Rep.  625  .  17 

United  States  v.  Lamson,  165  Fed.  80  .  .  .  .90,  90 
United  States  v.  Lamson,  173  Fed.  673  .  .  .  90,  101 
United  States  v.  Little  Miami,  etc.,  R.  R.  Co.,  1  Fed. 

700 113,  114,  114,  122 

United  States  v.  Louisville  &  N.  R.  Co.,  33  Fed.  829  .  49 
United  States  v.  Mann,  95  U.  S.  580  .  .  .  130 

United  States  v.  Marion  Trust  Co.,  143  Fed.  301;  aff. 

205  U.  S.  539 114 

United  States  v.  Marquette,  etc.,  R.  Co.,  17  Fed.  719  .  126 
United  States  v.  Mayer,  Deady,  127  ....  37,  54 
United  States  v.  Morse,  161  Fed.  429  ....  63 
United  States  v.  Palmer,  3  Wheat.  610  ....  3 

United  States  v.  Philadelphia,  etc.,  R.  R.  Co.,  123  U.  S. 

113;  8  Sup.  Ct.  Rep.  77 113 

United  States  v.  Railroad  Co.,  17  Wall.  322  ...  4 

United  States  v.  Rindskopf,  105  U.  S.  418  ...  137 
United  States  v.  Savings  Bank,  104  U.  S.  728  137,  138,  138 
United  States  v.  Schillinger,  14  Blatchf.  71  ...  37 
United  States  v.  Schurz,  102  U.  S.  378  .  .  .  .  134 
United  States  v.  Smith,  1  Sawy.  277  ....  35,  37 
United  States  v.  Snyder,  149  U.  S.  210  .  .  .  .  125 
United  States  v.  Three  Railroad  Cars,  1  Abb.  (U.  S.) 

196 17 

United  States  v.  Two  Hundred  Barrels  of  Whiskey,  95 

U.  S.  571  . 90 

United  States  v.  U.  S.  Fidelity  &  Guaranty  Co.,  144 

Fed.  866   .  101 


TABLE    OF   CASES   CITED.  xxi 

[References  are  to  sections] 

SECTION 

United  States  v.  U.  S.  Fidelity  &  Guaranty  Co.,  158 
Fed.  604 101 

United  States  v.  Windom,  137  U.  S.  636;  11  Sup.  Ct. 
Rep.  197 134 

Van  Dresser  v.  Oregon  Ry.,  etc.,  Co.,  48  Fed.  202  .  28 
Veazie  Bank  v.  Fenno,  8  Wall.  533  ....  145 
Vermont  Central  R.  Co.  v.  Burlington,  28  Vermont,  193  43 

Watson  v.  Royal  Ins.  Co.,  (1896)  1  Q.  B.  41  .  .  47 
Watson  v.  Sandie,  (J898)  1  Q.  B.  326  .  .  .  .  28 
Webber  Hospital  Ass'n  v.  McKenzie,  (Me.)  71  Atl.  1062  18 
Werle  &  Co.  v.  Colquhoun,  20  Q.  B.  D.  753  .  .  28,  28 

Western  Union  Tel.  Co.  v.  Massachusetts,  125  U.  S. 

530;  8  Sup.  Ct.  Rep.  961 142 

Westhus  v.  Union  Trust  Co.,  164  Fed.  795;  90  C.  C.  A. 

441 114 

Wright  v.  Blakeslee,  101  U.  S.  174  .  .  .  .  137, 137 


TABLE  OF  FEDERAL  STATUTES 
CITED 

[References  are  to  sections] 

SECTION 

REVISED  STATUTES 

Section  1 130n. 

Section  5      .        . 29 

Section  161 128 

Section  251 88,  128 

Section  321  .        . 90n.,  129 

Section  3152 104 

Section  3163 106,  130 

Section  3164 130 

Section  3165 .        88,  130 

Section  3169 130 

Title  35,  Chapter  2  (heading) 129n. 

Section  3172 106 

Section  3173 130 

Section  3174 130 

Section  3175         .......     109,   130 

Section  3176 130 

Section  3177 130 

Section  3179        . 130 

Section  3180 130 

Section  3182 129 

Section  3183 123 

Section  3184 130 

Sections  3187-3195 125 

Sections  3196-3205     .       .  125 


XXIV         TABLE  OF  FEDERAL  STATUTES   CITED. 

[References  are  to  sections] 

SECTION 

REVISED  STATUTES  —  Continued 

Section  3205 125 

Section  3206 125 

Section  3207 125 

Section  3209 125 

Section  3214 126n. 

Section  3220 138 

Section  3224 132 

Section  3226 137 

Section  3227 137 

Section  3228 138 

Section  3249  90n. 


ACT,  Aug.  15,  1876,  c.  304 88 

ACT,  March  1,  1879,  c.  125 

Section  2 104,  130 

Sections 125 

ACT,  Aug.  27,  1894,  c.  349  (Income  Tax  Law) 

Section  28 69 

Section  34 130 

Section  36 101 

ACT,  May  28, 1896,  c.  252,  section  19      ....  88 
ACT,  June  13,  1898,  c.  448  (War  Revenue  Act),  sec- 
tion 28 43 

ACT,  March  2,  1901,  c.  814 88 

ACT,  May  9,  1902,  c.  784  (Oleomargarine  Act),  sec- 
tion 6  lOln. 

ACT,  Aug.  5,  1909,  c.  6 

Title 3 

Section  1 27 

Section  5 27 

Section  38 

Par.  1   .   5,  6,  9,  10,  15,  17,  19,  21,  22,  23,  24,  25, 

26,  27,  28,  29,  37,  38,  44A,  45,  84A,  121 

Par.  2  .  10,  27,  31,  33,  45,  46,  49,  50,  53,  55,  57, 


TABLE  OF  FEDERAL  STATUTES   CITED.          XXV 

[References  are  to  sections] 

SECTION 
ACT,  Aug.  5,  1909,  Par.  2  —  Continued 

58,  59,  60,  61,  62,  63,  65,  67,  68,  71,  72,  74,  78, 
80,  81,  82,  83,  84,  84A 

Par.  3  .   27,  45,  50,  84A,  86,  87,  88,  89,  90,  91,  92, 

93,  94,  95,  96,  97,  98,  99,  99A,  101,  102 

Par.  4  ...    104,  106,  107,  108,  109,  110,  112 

Par.  5  .       .86,  103,  112,  113,  119,  121,  122,  123 

Par.  6 102,  116 

Par.  7 117 

Par.  8  .  104,  109,  115,  118,  121,  123,  125,  127,  132 
Section  42 .  29,  39 


FEDEEAL 
CORPORATION  TAX  LAW 


CHAPTER   I 

INTRODUCTORY 

Origin  of  the  tax. 

Its  form. 

Purpose  of  the  law — general  rule  of  construction. 

§  1.  Origin  of  the  Tax.  —  The  new  federal  tax 
on  corporations  and  companies  is  the  resultant  of 
several  political  forces  which  were  brought  into 
play  during  the  discussion  of  the  Tariff  Act  of  1909. 
Congress,  it  will  be  remembered,  had  convened 
upon  the  call  of  the  President  in  extraordinary 
session  for  the  purpose,  as  many  people  hoped 
and  as  a  few  believed,  of  reducing  the  tariff  duties 
upon  imports.  A  bill  for  that  purpose,  in  accord- 
ance with  the  constitutional  requirement,  could 
only  originate  in  the  House  of  Representatives. 
Accordingly,  a  comprehensive  tariff  bill  was  intro- 
duced in  that  body,  and  under  its  expeditious  rules 


'2    '  FEDERAL   CORPORATION  TAX  LAW. 

was  speedily  passed.  When  this  bill  reached  the 
Senate,  however,  it  was  subjected  to  considerable 
discussion.  A  large  number  of  Senators,  for  one 
reason  or  another,  were  in  favor  of  incorporating 
in  the  bill  a  provision  for  a  tax  upon  incomes,  both 
of  individuals  and  of  corporations.  The  dominant 
party,  or  faction,  was  opposed  to  this  measure,  for 
reasons  which  it  is  not  now  material  to  inquire 
into.  They  were  obliged  to  admit,  however,  that 
the  scale  of  duties  on  imports  which  they  were 
desirous  of  maintaining  and  which  the  bill  provided 
for,  would  not,  in  all  probability,  raise  sufficient 
revenue  to  supply  the  needs  of  the  government. 
Possibly,  had  the  tariff  duties  been  reduced,  so  as 
to  remove  the  virtual  embargo  which  they  imposed 
on  many  articles  of  foreign  commerce,  this  pros- 
pective deficit  might  have  been  averted;  but  that 
remedy  was  regarded  as  even  worse  than  an  income 
tax.  Yet  so  long  as  the  proposed  income  tax 
was  the  only  suggested  source  of  additional  revenue, 
as  an  alternative  to  the  inadmissible  plan  of 
reducing  duties  on  imports,  there  was  a  strong 
probability  that  an  income  tax  would  be  adopted. 
In  vain  the  powers-that-be  argued  that  an  unap- 
portioned  income  tax  would  certainly  be  pro- 
nounced unconstitutional  by  the  Supreme  Court, 
and  that  the  government  would  thus  be  left  with- 
out adequate  revenue,  as  was  the  case  when  the 
Income  Tax  of  1894  met  a  similar  fate.  In  spite 
of  all  these  arguments,  the  adoption  of  an  income 
tax  by  the  Senate  seemed  imminent. 


INTRODUCTORY.  3 

At  this  point,  a  plan  was  devised  —  by  whom  we 
need  not  stop  to  inquire  —  which,  it  was  supposed, 
would  raise  sufficient  revenue,  would  avoid  the 
constitutional  objections  to  a  general  income  tax, 
and  would  at  the  same  time  enable  the  leaders  of 
the  Senate  to  escape  the  humiliation  of  a  defeat 
upon  the  proposed  income-tax  amendment  to  the 
tariff  bill.  This  plan  was  a  so-called  excise  tax 
on  corporations  and  companies  in  proportion  to 
their  income.  This  plan  was  incorporated  in  an 
amendment  to  the  tariff  bill,  which  was  adopted 
in  the  Senate,  and  concurred  in  by  the  House  of 
Representatives.  The  bill  including  this  feature 
was  signed  by  the  President  on  August  5th,  1909. 

§  2.  Its  Form.  —  Thus  it  comes  about  that  the 
so-called  corporation  tax  is  embodied  in  a  single 
section  of  the  Tariff  Act  —  numbered  Section 
Thirty-eight.  This  Section  embraces  substantially 
all  of  the  provisions  of  the  very  voluminous  statute 
(which  appears  as  Chapter  Six  of  the  Acts  of  the 
Sixty-first  Congress)  that  in  any  way  relate  to 
the  corporation  tax.  The  other  provisions  relate 
to  duties  on  imports,  to  the  creation  of  a  Court  of 
Customs  Appeals,  and  to  some  other  more  or  less 
connected  topics.  Section  Thirty-eight,  which  will 
be  found  in  the  Appendix,  is  of  considerable  length, 
and  is  itself  divided  into  several  numbered  sub- 
sections, —  themselves  of  no  inconsiderable  length 
—  which  in  this  book  will  be  referred  to  as  Para- 
graphs. As  these  Paragraphs  are,  some  of  them, 
so  long  that  a  mere  reference  to  Paragraph  One, 


4  FEDERAL  CORPORATION  TAX  LAW. 

Two,  Three  or  Four,  as  the  case  might  be,  would 
often  require  the  reader  to  search  through  an 
involved  mass  of  print  in  order  to  discover  the 
particular  passage  intended,  it  has  seemed  desirable 
to  number  the  lines  of  these  paragraphs.  Accord- 
ingly, the  lines  of  each  numbered  Paragraph  of  Sec- 
tion Thirty-eight  will  be  found  in  the  Appendix  to 
be  numbered  by  numerals  in  the  margin.  It  is  to 
those  lines  as  printed  in  this  Appendix,  and  not  to 
the  numbers  of  the  lines  in  the  official  text  of  the 
Act  as  printed  in  the  Statutes  at  Large,  that 
references  are  made  throughout  this  book.1 

§  3.  Purpose  of  the  Law  —  General  Rule  of  Con- 
struction. —  It  is  perhaps  not  superfluous  to  say 
that  the  primary  object  of  the  law,  as  a  revenue 
law,  is  to  produce  revenue.  Nevertheless,  it  is 
pertinent  to  mention  that  the  title  of  the  Act  sets 
out  as  one  of  its  objects  to  "  encourage  the  indus- 
tries of  the  United  States."  2  There  is  no  reason 
to  confine  this  object  to  so  much  of  the  Act  as 
levies  duties  on  imports.  On  the  contrary,  it  may 
well  indicate  that  no  unnecessary  burdens  were 
intended  to  be  imposed  on  "  the  industries  of  the 
United  States,"  and  may  properly  induce  the 
courts  in  any  doubtful  case  to  incline  towards 
a  construction  which  will  "  encourage "  those 

1  The  method  of  citation  is  on  this  order,  "  Act,  Par.  1, 
line  1."  Wherever  the  word  "Act"  is  used  in  citations 
without  mentioning  date  or  chapter,  it  is  to  be  understood 
that  reference  is  had  to  the  Act  of  Aug.  5th,  1909,  c.  6,  §  38. 

3  See  infra  Appx.  I. 


IKTRODtJCTOEY.  5 

industries,  or  at  least  will  not  discourage  them  by 
the  imposition  of  unduly  grievous  burdens.1  "  The 
industries  of  the  United  States  "  are,  to  a  vastly 
preponderating  extent,  carried  on  by  corporations 
which  are  subject  to  this  tax,  and  it  would  be  a  poor 
way  to  "  encourage "  them  to  impose  on  them 
such  heavy  burdens  and  to  subject  them  on  mere 
suspicion  to  such  inquisitorial  examination  and 
ruinous  publicity,  as  to  compel  many  of  them  to 
quit  business.  Such  a  method  of  encouragement 
would  be  that  of  the  French  captain  who  hanged  a 
number  of  his  men  from  the  yard-arms  "  pour 
encourager  les  autres."  Especially  in  view  of  the 
title  of  the  Act,  the  courts  should  lean  against  a 
construction  that  would  produce  such  results. 

1  That  in  construing  an  Act  of  Congress  the  courts  may 
properly  be  influenced  by  its  title,  see  Holy  Trinity  Church 
v.  United  States,  143  U.  S.  457,  462;  United  States  v.  Fisher, 
2  Cranch  358,  386;  United  States  v.  Palmer,  3  Wheat.  610, 
631. 


CHAPTER   II 

WHAT   THE   TAX   IS  ON 

§  4  How  to  determine  what  property  or  rights  a  tax  is 
levied  upon  —  in  general. 

§§  5-10  Is  this  tax  levied  upon  the  business  or  upon  the  in- 
come? 

§  5        Discordant  provisions  of  the  Act. 

§  6        Name  of  tax  not  conclusive. 

§  7  Statement  of  question  —  Is  the  income  a  mere  meas- 
ure of  the  business? 

§  8        Tax  not  laid  on  all  who  do  business. 

§  9        Is  the  tax  laid  on  companies  which  do  no  business? 

§  10  Tax  not  gauged  by  amount  of  business  but  by 
amount  of  income  from  all  sources. 

§  11  Tax  not  laid  on  franchise  to  be  a  corporation. 

§  12  On  privilege  of  having  a  share-capital? 

§  13  Not  a  tax  on  dividends. 

§  14  Differences  from  an  income  tax. 

§  4.  How  to  Determine  what  Property  or  Rights 
a  Tax  is  Levied  upon  —  In  General.  —  A  question 
the  determination  of  which  will  control  many  sub- 
ordinate questions  as  to  the  construction  of  the 
Act  is,  "  Upon  what  is  the  tax  laid?  "  Is  it  a  tax 
upon  the  property  of  the  companies,  or  upon  their 
income,  or  upon  their  "  franchise  "  or  business? 


WHAT  THE  TAX  IS  ON.  7 

Now,  prima  facie  a  tax  is  laid  upon  that  in  pro- 
portion to  which  its  amount  is  gauged.  It  is 
true  that  a  tax  upon  one  right  or  privilege, 
particularly  some  intangible  right  or  privilege, 
may  be  laid  in  proportion  to  the  value  of  some 
other  property  without  being  a  tax  upon  that 
property;  l  but  this  is  only  true  where  the  value 
of  the  property  by  which  the  tax  is  gauged 
is  a  reasonable  measure  of  the  value  of  the  in- 
tangible right  or  privilege,  or  where  the  intangible 
right  might  be  altogether  taken  away  by  the  tax- 
ing government  and  may  therefore  be  conceded 
on  such  conditions  as  that  government  pleases.2 

1  For  example,  an  excise  tax  on  the  business  of  a  corpora- 
tion may  be  proportioned  to  the  amount  paid  out  by  the 
company  for  dividends  on  its  stock  and  interest  on  its  bonded 
debt:   Railroad  Co.  v.  Collector,  100  U.  S.  595  (to  be  com- 
pared with  United  States  v.  Railroad  Co.,  17*  Wall.  322). 
So,  a  tax  on  the  privilege  of  taking  property  by  will  may  be 
proportioned  to  the  value  of  the  property  so  passing,  and 
is  not  on  that  account  converted  into  a  tax  on  the  property: 
Plummer  v.  Coler,  178  U.  S.  115.    And  a  tax  on  corporations 
on  the  amount  of  "  capital  employed  "  in  the  state  is  not 
invalid  because  some  of  that  capital  may  consist  of  articles 
of  interstate  commerce  in  the  original  packages:    New  York 
State  v.  Roberts,  171  U.  S.  658,  664;    19  Sup.  Ct.  Rep.  58. 
Moreover,  a  tax  may  be  laid  on  an  interstate  railway  company 
graduated  according  to  the  cash  value  of  so  many  of  its  shares 
of  stock  as  bear  to  the  whole  number  of  shares  the  same 
proportion  that  its  length  of  railway  within  the  state  bears 
to  its  total  length;    and  such  a  tax  though  proportioned  to 
the  value  of  the  shares  is  not  a  tax  on  the  shares:  Delaware 
Railroad  Tax,  18  Wall.  206. 

2  Cf .  infra  §  40. 


8  FEDEBAL  CORPORATION  TAX  LAW. 

For  instance,  if  a  tax  were  laid  on  corporations 
in  proportion  to  the  value  of  the  real  estate  owned 
by  them,  few  persons  would  deny  the  tax  to  be  a 
tax  on  land,  although  it  might  not  be  so  denomi- 
nated by  the  legislature. 

§  5.  Is  this  Tax  Levied  upon  the  Business  or 
upon  the  Income?  —  Discordant  Provisions  of  the 
Act.  —  Now,  the  present  tax  is  expressed  to  be 
laid  on  the  companies  "  with  respect  to  the  carrying 
on  or  doing  business."  *  This  would  apparently 
indicate  that  the  tax  is  laid  on  the  intangible  right 
sometimes  designated  as  goodwill  —  that  pecul- 
iar value  which  springs  into  being  when  tangible 
property  is  joined  together  by  unity  of  use  as  "  a 
single  producing  plant."  2  The  tax  is  not,  however, 
directly  proportioned  to  the  amount  of  business 
done,  nor  to  the  amount  of  income  derived  there- 
from, but  to  the  net  income  received  by  the  com- 
pany "  from  all  sources/7  3  including  income  from 
invested  property  as  well  as  from  the  transaction 
of  the  company's  business. 

§  6.  Name  of  Tax  not  Conclusive.  —  Now,  the 
legislative  declaration  that  the  tax  is  laid  "  with 
respect  to  the  carrying  on  or  doing  business  "  is 
not  conclusive,  if  the  courts  can  see  that  notwith- 
standing its  name  the  tax  is  in  fact  laid  upon  in- 


1  Act,  Par.  1,  lines  14-15  (infra  Appx.  I). 

2  Adams  Express  Co.  v.  Ohio,  166  U.  S.  185;  17  Sup.  Gt. 
Rep.  604;  Honolulu  Transit  Co.  v.  Wilder,  211  U.  S.  137,  142. 

8  Act,  Par.  1,  line  19  (infra  Appx.  I). 


WHAT  THE  TAX  IS  Off.  Q 

come,1  although  undoubtedly  a  very  high  degree 
of  deference  will  be  paid  to  the  designation  of  the 
tax  by  Congress  as  an  excise  tax  on  the  transaction 
of  business.  So  also,  there  is  no  difference  between 
a  tax  "  equal  to,"  or  as  this  Act  says  "  equivalent 
to,"  2  so  much  per  cent  of  the  income,  and  a  tax 
on  the  income,  of  so  much  per  cent.3 

§  7.  Statement  of  Question  —  Is  the  Income  a 
Mere  Measure  of  the  Business?  —  The  question  in 
the  last  analysis  is  this:  Is  the  tax  really  though 
not  nominally  a  tax  on  income,  or  is  the  income 
merely  used  as  a  convenient  and  proper  index  to 
the  value  or  amount  of  the  business?  It  should 
be  remembered  that  a  tax  on  the  business  is  what 
is  often  designated  —  though  in  the  writer's  opin- 
ion'inappropriately  designated  —  as  a  franchise 
tax.4 

§  8.  Tax  not  Laid  on  all  who  do  Business.  — 
The  fact  that  the  tax  is  not  laid  upon  all  persons 
who  do  business,  but  only  upon  companies,  is  not 
conclusive  to  show  that  it  is  not  a  tax  on  the 
business.  There  may  be  a  tax  on  the  transaction 
of  business  without  subjecting  to  the  tax  everybody 
who  transacts  business.  The  exemptions  may  con- 

1  Galveston,  Harrisburg,  etc.,  Ry.  Co.  v.  Texas,  210  U.  S, 
217.    Cf.  Stockard  v.  Morgan,  185  U.  S.  27,  37;  22  Sup.  Ct. 
Rep.  576. 

2  Act,  Par.  1,  line  17  (infra  Appx.  I). 

8  Galveston,  Harrisburg,  etc.,  Ry.  Co.  v.  Texas,  210  U.  S, 
217,  227-228;  20  Sup.  Ct.  Rep.  829. 
4  See  infra  §11. 


10  FEDERAL   CORPORATION   TAX   LAW. 

ceivably  destroy  the  uniformity  of  the  tax,  and 
render  the  act  obnoxious  to  constitutional  objec- 
tions on  the  score  of  inequality;  but  they  do  not 
show  that  the  tax  is  other  than  what  it  is  denom- 
inated by  the  legislature  —  a  tax  on  business. 
Indeed,  if  the  tax  is  to  be  deemed  an  income  tax, 
it  must  still  be  acknowledged  that  it  is  not  laid 
upon  all  persons  who  enjoy  incomes. 

§  9.  Is  the  Tax  laid  on  Companies  which  do  no 
Business?  —  If,  however,  the  tax  is  laid  upon 
companies  which  do  no  business,  it  cannot  be  a 
tax  on  business.  You  cannot  tax  a  company  on  a 
business  which  it  has  not.  Now,  in  the  case  of 
domestic  companies,  there  is  no  express  exemption 
of  those  companies  which  are  not  carrying  on 
business:  the  language  is  general  —  "every  cor- 
poration, joint  stock  company  or  association, 
organized  for  profit  and  having  a  capital  stock 
represented  by  shares,  and  every  insurance  com- 
pany, now  or  hereafter  organized  under  the  laws 
of  the  United  States  or  of  any  State  or  Territory 
of  the  United  States  or  under  the  acts  of  Congress 
applicable  to  Alaska,  .  .  .  shall  be  subject  to  pay 
annually  a  special  excise  tax."1  If,  however,  the 
tax  is  a  tax  on  business,  then  it  must  be  held  that 
domestic  companies  which  do  no  business  shall  pay 
no  tax,  even  though  they  may  derive  an  income 
from  invested  property.  In  this  aspect,  it  is  as  if  a 
law  should  provide  that  every  corporation  shall 
be  subject  to  pay  a  tax  on  its  real  estate;  for  in 

1  Act,  Par.  1,  lines  1-14  (infra  Appx.  I). 


WHAT  THE  TAX   IS   ON.  11 

that  case  nobody  would  claim  that  a  corporation 
owning  no  land  should  nevertheless  pay  a  tax. 

In  truth,  in  respect  to  the  question  whether 
domestic  companies  which  are  doing  no  business 
but  which  derive  an  annual  income  exceeding  five 
thousand  dollars  from  invested  capital  are  liable 
to  tax,  two  clauses  of  the  Act  are  in  conflict.  On 
the  one  hand,  if  effect  is  to  be  given  to  the  provision 
that  the  tax  is  laid  "  with  respect  to  the  carrying 
on  or  doing  business/'  then  such  companies  are 
riot  liable  to  the  tax;  but  if,  on  the  other  hand, 
effect  is  to  be  given  to  the  other  provision  of  the 
same  section  that  all  domestic  companies  having  a 
capital  stock  divided  into  shares  shall  pay  a  tax 
equal  to  one  per  cent  of  the  net  income  over  and 
above  five  thousand  dollars  received  during  the 
year  from  all  sources,  the  tax  in  the  case  suggested 
would  be  payable.  The  question  is  whether  the 
apparent  intention  to  exact  a  tax  if  any  of  the 
companies  described  in  the  Act  receives  an  income, 
from  any  source,  in  excess  of  five  thousand  dollars 
is  overbalanced  by  the  express  provision  that  the 
tax  is  laid  on  the  transaction  of  business.  In  order 
to  determine  this,  we  must  look  at  other  portions 
of  the  Act. 

In  respect  to  foreign  companies,  the  Act  ex- 
plicitly states  that  only  such  companies  as  are 
"  engaged  in  business  in  any  State  or  Territory  of 
the  United  States  or  in  Alaska  or  in  the  District  of 
Columbia,"  are  liable  to  the  tax.1  It  is,  therefore, 

1  Act,  Par.  1,  lines  9-12  (infra  Appx.  I). 


12  FEDERAL   CORPORATION   TAX  LAW. 

clear  that  a  foreign  company  which  does  no  busi- 
ness 1  is  not  subject  to  tax,  although  it  may  derive 
an  income  from  capital  invested  in  the  United 
States. 

§  10.  Tax  not  Gauged  by  Amount  of  Business 
but  by  Amount  of  Income  from  all  Sources.  —  It 
is  quite  clear  that  the  tax  with  respect  both  to 
domestic  and  to  foreign  companies  is  not  at  all 
graduated  according  to  the  amount  of  business 
done,  and  that  a  diminution  in  the  amount  of 
business  does  not  necessarily  work  any  correspond- 
ing diminution  in  the  amount  of  the  tax.  This 
is  clear  enough  even  in  the  case  of  a  domestic  com- 
pany; for  the  Act  expressively  provides  that  the 
amount  of  the  tax  shall  be  one  per  cent  of  the 
income  "  received  by  it  from  all  sources,"  2  and 
not  merely  from  its  business.  Though  the  business 
were  carried  on  at  a  loss,  yet  if  the  losses  were 
overbalanced  to  the  extent  of  five  thousand  dollars 
by  income  from  investments,  the  tax  would  be 
payable.  As  to  foreign  companies,  the  Act  is  if 
possible  still  more  express,  for  it  provides  that  the 
tax  shall  be  one  per  cent  on  the  net  income  in 
excess  of  five  thousand  dollars  received  "  from 
business  transacted  and  capital  invested  within 
the  United  States."  3  These  circumstances  cer- 

1  As  to  what  is  "  doing  business,"  see  infra  §  28. 

2  Act,  Par.  1,  line  19  (Appx.  I). 

1  Act,  Par.  1,  lines  27-28  (infra  Appx.  I).  So,  Paragraph 
2  provides  that  the  net  income  of  a  foreign  company  subject 
to  the  tax  shall  be  calculated  by  making  certain  deductions 


WHAT  THE  TAX  IS  ON.  13 

tainly  tend  to  show  that  the  tax  is  really  laid  on 
income  and  not,  as  it  purports  to  be,  on  the  carrying 
on  of  business.  For  while  a  tax  on  business  may 
appropriately  be  measured  by  the  amount  of 
income  received  from  that  business,1  yet  it  is 
difficult  to  see  how  it  can  be  affected  by  the  amount 
of  income  received  from  other  sources  without 
losing  its  character  as  a  tax  on  business.2 

Moreover,  as  will  be  explained  below,  there  is  on 
the  face  of  the  Act  a  doubt  whether  income  received 
by  the  company  as  trustee  is  to  be  included  in  the 
assessment.  If  so,  that  fact  certainly  goes  a  long 
way  towards  showing  that  the  tax  is  really  laid 
on  income  and  not  on  business. 

§  11.  Tax  not  laid  on  Franchise  to  be  a  Cor- 
poration. —  The  tax  certainly  cannot  be  regarded 
as  laid  upon  the  so-called  "  franchise  "  or  privilege 
of  being  a  corporation;  for  the  Act  is  expressly 
applicable  not  only  to  corporations  but  also  to 
many  unincorporated  bodies,  namely,  "  every  joint 

from  "  the  gross  amount  of  its  income  received  within  the 
year  from  business  transacted  and  capital  invested  within 
the  United  States."  See  infra  §  78. 

So  the  return  on  behalf  of  a  foreign  company  must  state 
the  gross  income  received  from  "  business  transacted  and 
capital  invested  "  in  the  United  States.  See  infra  §  93. 

1  Maine  v.  Grand  Trunk  Ry.  Co.,  142  U.  S.  217,  228-229; 
12Sup.Ct.  Rep.  121, 163. 

2  Compare  cases  cited  infra  §  40.    See  also  an  elaborate 
and  valuable  note  in  57  L.  R.  A.  48-53,  where  a  full  collection 
will  be  found  of  the  then  existing  authorities  upon  the  dis- 
tinction between  a  property  tax  and  a  franchise  tax,  or  tax 
on  the  business. 


14  FEDERAL  CORPORATION  TAX  LAW. 

stock  company  or  association  organized  for  profit 
and  having  a  capital  represented  by  shares/'  l 
This  is  sufficient  to  dispose  of  any  contention  that 
the  tax  is  laid  on  any  corporate  franchise  or 
privilege,  if  there  be  any  such  thing  under  modern 
liberal  incorporation  laws.2  Taxes  on  the  business 
of  corporations  are  often  spoken  of,  even  by  the 
best  authorities,  as  franchise  taxes; 3  but  those 

1  Cf.  Gleason  v.  McKay,  134  Mass.  419  (where  a  statute 
purporting  to  extend  to  unincorporated  companies  a  tax 
laid  by  a  previous  statute  on  the  "  franchises  "  of  certain 
corporations  —  substantially  the   same   statute  which  was 
held   constitutional   in   Hamilton   Co.   v.   Massachusetts,   6 
Wall.  632  —  was  held  unconstitutional  because  the  unincor- 
porated companies  had  no  "  franchises  ") ;  Philadelphia,  etc., 
S.  S.  Co.  v.  Pennsylvania,  122  U.  S.  326,  342;    7  Sup.  Ct. 
Rep.   1118  (where  the  court  reasoned  that  a  certain  tax 
"  certainly  could  not  have  been  intended  as  a  tax  on  the 
corporate  franchise,  because,  by  the  terms  of  the  act,  it  was 
laid  equally  on  the  corporations  of  other  states  doing  business 
in  Pennsylvania"). 

2  See  1  Machen,  Modern  Law  of  Corps.,  §  19,  §  20.    Al- 
though there  may  not  be  any  "  franchise  to  be  a  corporation," 
in  the  proper  sense  of  those  words,  under  modern  incorpora- 
tion laws;   yet  there  is  certainly  a  right  to  be  a  corporation, 
although  that  right  is  free  to  everybody:    And  the  exercise 
of  this  right  may  be  taxed,  just  as,  for  example,  the  exercise 
of  the  right  to  execute  a  conveyance  of  land  may  be  taxed. 

3  Provident  Inst.  v.  Massachusetts,  6  Wall.  611;    Society 
for  Savings  v.  Coite,  6  Wall.  594;    Honolulu  Transit  Co.  v. 
Wilder,   211   U.  S.   137.     A  so-called  "  privilege  tax "  on 
corporations  is  a  tax  on  property;  Gulf,  etc.,  R.  R.  Co.  v. 
Hewes,  183  U.  S.  66;  22  Sup.  Ct.  Rep.  26;  but  not  of  course 
on  the  tangible  property  of  the  corporation.    Hamilton  Co, 
V.  Massachusetts,  6  Wall  632, 


WHAT  THE  TAX  IS  ON.  15 

expressions  can  hardly  be  taken  as  conclusive  of 
the  propriety  of  that  terminology.1  Still  less  can 
they  properly  be  used  as  a  basis  for  the  deduction 
that  such  a  tax,  if  laid  by  Congress,  would  be  an 
unconstitutional  burden  on  a  state  franchise  or 
agency.2 

§  12.  On  Privilege  of  Having  a  Share-Capital?  — 
It  may  be  said,  however,  that  the  tax  is  upon  the 
privilege  of  having  a  capital  stock  represented  by 
shares.  This  can  hardly  be,  however;  for  the  Act 
applies  to  all  insurance  companies,  even  those  which 
have  no  capital  stock.3  Moreover,  although  the  right 
to  have  a  capital  stock  divided  into  shares  is  of  some 
value,  yet  it  is  hardly  reasonable  to  say  that  it  bears 
any  relation  to  the  total  amount  of  net  income  from 
all  sources  received  by  the  company,  in  proportion 
to  which  this  tax  is  graduated. 

§  13.  Not  a  Tax  on  Dividends.  —  This  tax  is 
certainly  not  a  tax  on  dividends;  for  tlie  tax  is 
payable  although  no  dividends  are  declared.  The 
company  may  choose  to  accumulate  its  earnings 
as  a  surplus  or  reserve;  and  yet  the  tax  would  be 
payable  on  the  net  income  in  excess  of  $5,000. 
Moreover,  as  shown  below,  in  some  circumstances 
where  dividends  may  be  declared  and  paid,  even 
to  an  amount  exceeding  five  thousand  dollars,  yet 

1  It  is  submitted  that  a    more   accurate,  though   more 
cumbrous,  name  is  "  tax  on  business  transacted,"  or,  more 
briefly,  "  business  tax." 

2  See  infra  §145. 

3  gee  infra  §  20, 


16  FEDERAL  CORPORATION  TAX  LAW. 

the  tax  would  not  be  payable.1  A  tax  on  dividends 
paid  to  shareholders  is  doubtless  an  excise;  but 
this  is  not  such  a  tax. 

§  14.  Differences  from  an  Income  Tax.  —  If  the 
tax  is  not  a  tax  on  income,  it  has  all  the  appearances 
of  such  a  tax.  Its  amount  is  to  be  calculated  for 
all  the  world  like  the  amount  of  an  income  tax. 
It  differs  from  an  income  tax  in  but  two  respects 
at  most  —  (1)  in  name,  and  (2)  in  that  it  is  not, 
perhaps,  payable  unless  the  company  in  question 
is  doing  some  business  of  some  kind.2 

1  Infra  §31. 

2  Whether  in  such  a  case  the  tax  would  -be  payable,  see 
supra  §8. 


CHAPTER   III 

WHAT  COMPANIES  ARE   SUBJECT   TO  THE   TAX 

§  15    In  general. 

§  16    Unincorporated  companies. 

§  17     "  Organized  for  profit.'1 

§  18        How  objects  of  company  determined  for  purposes  of 

the  Act. 

§  19    "  Having  a  capital  stock  represented  by  shares/' 
§  20    Insurance  companies. 

§§  21-26  Expressly  excepted  classes  of  companies. 
§  21        In  general. 
§  22        Labor  organizations. 
§  23        Agricultural  or  horticultural  organizations. 
§  24        Fraternal  beneficiary  societies. 
§  25        Building  and  loan  associations. 
§  26        Religious,  charitable  or  educational  corporations. 
§§  27-29  Foreign  companies. 
§  27         Line  of  demarkation  between  foreign  and  domestic 

companies. 
§  28        What   is    "engaged    in    business   in   the   United 

States." 
§  29     Corporations  organized  or  dissolved  with  the  year,  etc. 

§  15.  In  General.  —  The  class  of  companies 
subject  to  the  Act  is  thus  defined: 

"  Every  corporation,  joint  stock  company  or 
association,  organized  for  profit  and  having  a  capital 
stock  represented  by  shares,  and  every  insurance 


18  FEDERAL   CORPORATION   TAX   LAW. 

company,  now  or  hereafter  organized  under  the 
laws  of  the  United  States  or  of  any  State  or  Terri- 
tory of  the  United  States,  or  under  the  Acts  of 
Congress  applicable  to  Alaska  or  the  District  of 
Columbia,  or  now  or  hereafter  organized  under  the 
laws  of  any  foreign  country  and  engaged  in  business 
in  any  State  or  Territory  of  the  United  States  or  in 
Alaska  or  in  the  District  of  Columbia.  .  .  .  Pro- 
vided, however,  that  nothing  in  this  section  con- 
tained shall  apply  to  labor,  agricultural,  or  horti- 
cultural organizations,  or  to  fraternal  beneficiary 
societies,  orders,  or  associations  operating  under  the 
lodge  system,  and  providing  for  the  payment  of 
life,  sick,  accident,  and  other  benefits  to  the  mem- 
bers of  such  societies,  orders  or  associations,  and 
dependents  of  such  members,  nor  to  domestic  build- 
ing and  loan  associations,  organized  and  operated 
exclusively  for  religious,  charitable,  or  educational 
purposes,  no  part  of  the  net  income  of  which  enures 
to  the  benefit  of  any  private  stockholder  or  indi- 
vidual." 

§  16.  Unincorporated  Companies.  —  It  will  be 
observed  that  the  Act  applies  not  only  to  corpora- 
tions, but  also  to  unincorporated  companies  or- 
ganized for  profit,  and  having  a  capital  represented 
by  shares.  The  word  "  companies  "  is  undoubtedly 
sufficient  to  cover  unincorporated  concerns,1  and 
the  same  is  true  of  the  word  "  associations." 2 

1  As  to  the  meaning  of  the  word,  see  1   Machen,  Mod. 
Law  of  Corps.,   §  30.     The  word  "  corporation,"  of  course, 
does    not    include    unincorporated    joint-stock    companies: 
Gregg  v.  Sanford,  65  Fed.  151;   12  C.  C.  A.  525. 

2  See  People  v.  Wemple,  6  L.  R.  A.  303;    117  N.  Y.  136 
(where  the  very  words,  "  corporation,  joint  stock  company 
or  association,"  in  a  tax  law  were  held  applicable  to  a  volun- 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    19 

-  §  17.  "  Organized  for  Profit."  —  These  words,1 
together  with  the  adjective  clause  by  which  they 
are  followed,  namely,  "  having  a  capital  stock 
represented  by  shares/'  probably  apply  to  "  cor- 
poration "  as  well  as  to  "  joint  stock  company  or 
association,"  and  therefore  only  such  corporations 
as  are  "  organized  for  profit "  are  subject  to  the 
tax.  Such  at  any  rate  must  be  the  interpretation, 
unless  the  comma  which  follows  the  word  "  as- 
sociation" is  to  be  disregarded;  and  the  punctua- 
tion of  a  statute,  although  entitled  to  but  slight 
consideration,  and  sometimes  treated  as  no  part 
of  the  statute  at  all,2  yet  may  be  looked  at  for 
guidance  where  the  words  unpunctuated  are 
ambiguous.3  The  only  argument  against  reading 
the  words  "  organized  for  profit "  as  applicable  to 

tary  association  formed  by  articles  of  agreement  which  con- 
tained no  reference  to  any  statute  but  which  purported  to 
confer  certain  quasi-corporate  powers  which  would  only  be 
lawful  under  certain  enabling  statutes). 

1  Act,  Par.  1,  lines  2-3  (infra  Appx.  1). 

2  United  States  v.  Isham,   17  Wall.  496;    Hammock  v. 
Farmers  L.  &  T.  Co.,  105  U.  S.  77;  United  States  v.  Lacher, 
134  U.  S.  624;  10  Sup.  Ct.  Rep.  625;  Ford  v.  Delta,  etc., 
Co.,  164  U.  S.  662,  674;    17  Sup.  Ct.  Rep.  230;    Maxwell, 
Interpretation  of  Statutes,  4th  ed.,  61-62. 

3  United  States  v.  Three  Railroad  Cars,  1  Abb.  (U.  S.), 
196,  210;   Cummings  v.  Akron  Cement,  etc.  Co.,  6  Blatchf., 
509,  511  (headnote  inadequate);    Commonwealth  v.  Kelley, 
177  Mass.,  221;   58  N.  E.,  691;  Tyrrell  v.  Mayor,  etc.  of  New 
York,  159  N.  Y.,  239;   53  N.  E.,  1111;   26  Am.  &  Eng.  Enc. 
of  Law,  2nd  ed.,  630;   Cf.  Ewing  v.  Burnet,  11  Pet.  41,  54 
(as  to  the  construction  of  a  charge  to  a  jury). 


20  FEDERAL   CORPORATION  TAX  LAW. 

"  corporation  "  is  found  in  the  fact  that  the  classes 
of  corporations  which  are  expressly  excepted  from 
the  operation  of  the  Act,1  are,  most  of  them,  cor- 
porations which  are  not  "  organized  for  profit," 
so  that  if  those  words  qualify  "  corporation  "  as 
well  as  "  joint  stock  company  or  association/'  the 
express  exceptions  become  largely  surplusage.  It 
would  seem  that  a  corporation  "  organized  for 
profit,"  is  another  name  for  what  is  often  desig- 
nated as  a  "  business  corporation."  2 

§  18.  How  Objects  of  Company  Determined  for 
Purposes  of  the  Act.  —  In  all 'cases  in  this  Act, 
as  well  as  elsewhere,  where  corporations  are  classi- 
fied with  respect  to  their  objects,  or  the  character 
of  their  business,  there  is  apt  to  be  an  ambiguity 
whether  the  objects  of  the  company  and  the  char- 
acter of  its  business  are  to  be  determined  for  pur- 
poses of  the  classification  by  its  ostensible  objects 
and  business  as  defined  in  its  charter  or  incorpora- 
tion paper,  or  by  the  real  objects  of  its  promoters, 

1  See  infra  §  21-§  26. 

2  See  1  Machen,  Mod.  Law  of  Corps.,  §  28,  where  authori- 
ties will  also  be  found  as  to  the  meaning  of  "  corporations 
formed  for  profit."    These  words  would  not  include  a  Board 
of  Trade:    People  v.  Board  of  Trade,  80  111.,  134,  136.    But 
cf.  Mersey  Docks  v.  Lucas,  8  A.  C.,  891  (corporation  formed  for 
management  of  public  docks,  whose  revenues  were  required 
to  be  applied  to  expenses,  interest  on  debt,  construction  and 
management,  and  accumulation  of  a  sinking  fund  for  ex- 
tinguishment of  the  principal  of  the  debt,  after  which  ex- 
tinguishment the  rates  should  be  reduced,  held  assessable 
for  income  tax  on  its  "  profits  ")• 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    21 

and  by  the  character  of  business  which  they 
actually  carry  on.1  This  question  repeatedly  recurs 
in  the  interpretation  of  the  present  Act,  and  is  here 
mentioned  once  for  all.  In  most  cases  the  objects 
of  a  company  and  the  character  of  its  business  are 
to  be  determined  for  purposes  of  the  Act  by  the 
charter  or  incorporation  paper,  rather  than  by  the 
business  which  the  company  actually  transacts. 
Thus,  the  expression,  corporations  organized  for 
profit,  evidently  refers  to  corporations  which  by 
their  charters  are  created  for  that  object,  and  would 
not  include  a  corporation  formed  ostensibly  for  a 
different  object,  but  actually  operated  for  purposes 
of  profit.  This  is  made  clearer  by  the  expression 
which  is  found  a  few  lines  below  in  the  same  para- 
graph of  the  statute,  "  organized  and  operated 
exclusively  for  religious,  charitable,  or  educational 
purposes/'  2  thus  drawing  a  distinction  between 
the  purposes  for  which  a  corporation  is  ostensibly 
"  organized,"  and  those  for  which  it  is  actually 
"  operated." 

1  See  1  Machen,  Mod.  Law  of  Corps.,  §  27.      In  addition 
to  cases  there  cited,  see  in  support  of  the  view  that  the 
classification  of  a  corporation  is  to  be  determined  exclusively 
with  reference  to  its  objects  as  expressed  in  its  charter  or 
incorporation  paper,  Speer  v.  Colbert,  200  U.  S.,  130;   26 
Sup.  Ct.,  201;   Bradfield  v.  Roberts,  175  U.  S.,  291;  20  Sup. 
Ct.  Rep.  121;    Colgate  v.  U.  S.  Leather  Co.,  72  Atl.  126 
(N.  J.  Eq.);    Webber  Hospital  Ass'n  v.  McKenzie,  71  Atl. 
1062  (Me.);    People  v.  Neff,  34  N.  Y.  App.,  Div.  83  (not 
exempt  from  taxation  as  a  charitable  corporation,  though 
funds  in  fact  devoted  to  charity). 

2  Act,  Par.  1,  lines  46-48  (infra  Appx.  I). 


22  FEDERAL   CORPORATION   TAX  LAW. 

§  19.  "  Having  a  Capital  Stock  Represented  by 
Shares."  —  These  words,  1  like  the  words  "  or- 
ganized for  profit,"  should  be  read  with  "  cor- 
poration," as  well  as  with  "  joint  stock  company  or 
association."2  No  corporations  except  such  as 
have  a  capital  stock  represented  by  shares  are 
subject  to  the  Act.  In  this  circumstance  lurks  a 
possible  method  for  evading  the  tax.  For,  in 
England,  companies  sometimes  issue  stock  which 
is  not  divided  into  indivisible  shares,  but  is  infinitely 
subdivisible.3  Although  this  form  of  security  may 
not  at  present  be  authorized  by  the  statutes  of  any 
American  State,  yet  there  is  nothing  to  prevent 
some  state  legislature  from  conforming  its  laws  in 
this  respect  to  the  British  Companies  Acts.  A 
corporation  organized  under  such  laws,  with  stock, 
in  the  English  sense  of  the  word,  and  not  shares, 
would  not  be  subject  to  this  federal  tax,  or  be 
bound  to  make  any  returns  under  the  Act;  for 
its  capital  stock  would  not  be  "  represented  by 
shares."  The  device  is  as  simple  as  it  is  efficacious. 

§  20.  Insurance  Companies.  —  Inasmuch  as  in- 
surance companies  would  undoubtedly  fall  within 
the  class  of  corporations  organized  for  profit,4  the 

1  Act,  Par.  1,  lines  3-4  (infra  Appx.  I). 

2  The  same  consideration  mentioned  above  with  respect 
to  the  words  "  organized  for  profit  "  apply  to  these  words. 
See  supra  §  17. 

3  1  Machen,  Mod.  Law  of  Corps.,  §494,  §495.     See  also 
Companies  (Consolidation)  Act,  1908,  Sec.  41. 

4  Hercules  Mut.  Life  Ass.  Soc.,  12  Fed.  Cas.  12;    Inde- 
pendent Ins.  Co.,  13  Fed.  Cas.  13.    Cf.  Equitable  Life  Ass. 


WHAT  COMPANIES   ARE  SUBJECT  TO  THE  TAX.    23 

only  effect  of  expressly  mentioning  "  every  insur- 
ance company  "  l  is  to  include  mutual  companies, 
which  would  otherwise  be  excluded  by  force  of  the 
words,  "  having  a  capital  stock  represented  by 
shares."  The  meaning  of  insurance  in  this  con- 
nection is  perhaps  not  easy  accurately  to  define.2 
The  days  when  all  insurance  could  be  divided  into 
the  three  classes  of  life,  fire,  and  marine,  have  long 
since  passed;  and  we  are  now  familiar  with  bur- 
glary insurance,  fidelity  insurance,  guaranty  insur- 
ance, and  indeed  still  other  forms  of  insurance. 
Yet,  certainly  guaranty  companies  are  not  usually 
included  within  the  term  "  insurance  companies  "; 
and  the  same  is  true  with  respect  to  companies 
formed  for  some  other  kinds  of  insurance  in  the 
broadest  meaning  of  that  term.  Until  the  courts 
have  construed  this  Act,  one  cannot  say  whether 
the  word  insurance,  as  therein  used,  refers  to  any 

Soc.  v.  Bishop  (1900),  1  Q.  B.  177;  New  York  Life  Ins.  Co.  v. 
Styles,  14  A.  C.  381  (income  of  mutual  insurance  company 
received  as  premiums  from  members  not  assessable  as  profits) ; 
Last  v.  London  Ass.  Co.,  10  A.  C.,  438  (seem  as  to  income 
derived  from  premiums  on  participating  policies  issued  by  a 
joint  stock  insurance  company). 

1  Act,  Par.  1,  line  4  (infra  Appx.  I). 

2  For  judicial   definitions   of   "  insurance "   and   "  insur- 
ance companies,"  see  those  titles  in  4  Words  and  Phrases 
Judicially  Denned,  pp.  3674,  3679,  and  also  22  Cyc,  1384,  tit. 
"  Insurance."     A  corporation  which  for  a  membership  fee 
agrees  to  clean  a  member's  bicycle,  repair  the  machine,  and 
replace  it  if  stolen,  is  not  to  be  incorporated  as  an  "  insur- 
ance   company":     Commonwealth    v.     Provident    Bicycle 
Ass'n,  178  Pa.  636;  36  L.  R.  A.  589;  36  Atl.  197. 


24  FEDERAL  CORPORATION  TAX  LAW. 

contract  whereby  money  is  to  be  paid  to  a  person 
upon  the  occurrence  of  a  specified  form  of  loss  or 
disaster,  so  that  "  insurance  companies  "  would 
include  any  company  engaged  in  the  business  of 
making  any  kind  of  such  contracts,  or  whether 
the  expression  is  used  in  a  narrower  and  more 
popular  sense. 

The  question  is  not  important  in  construing 
the  words  in  this  paragraph  of  the  Act,  because  the 
great  majority  of  such  companies  (with  the  excep- 
tion of  mutual  companies  for  insurance  upon  life 
and  against  fire,  which  are  indisputably  embraced 
within  the  heading  of  insurance  companies)  are 
formed  upon  the  ordinary  joint  stock  plan,  and 
would  therefore  be  embraced  by  the  words  "  cor- 
porations .  .  .  organized  for  profit  and  having  a 
capital  represented  by  shares/'  so  that  it  becomes 
unnecessary  to  determine  whether  they  would  also 
be  subject  to  the  Act  as  insurance  companies. 
The  same  question,  however,  will  recur,  because 
certain  special  allowances  are  permitted  to  "  insur- 
ance companies  "  in  calculating  their  net  income 
for  purposes  of  the  tax.1 

§  21.  Expressly  Excepted  Classes  of  Companies  — 
In  General.  —  The  express  exceptions  of  certain 
classes  of  organizations  from  the  operation  of  the 
Act 2  would  seem  to  have  been  inserted  out  of  abun- 
dant caution.  Few  of  the  excepted  classes  of  organ- 
izations are  ever  formed  upon  the  joint  stock 

1  See  infra,  §  58,  §  59. 

2  Act,  Par.  1,  lines  34-50  (infra  Appx.  I). 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    25 

plan,  and  almost  none  of  them  could  be  regarded 
as  "  organized  for  profit/7  or  as  having  any  "  busi- 
ness/' with  respect  to  the  carrying  on  or  doing  of 
which  the  tax  is  expressed  to  be  levied.  The  chief 
effect,  therefore,  of  the  insertion  of  these  express 
exceptions  is  to  becloud  the  interpretation  of  the 
Act,  and  to  cause  some  doubt  whether  the  words 
"  organized  for  profit  and  having  a  capital  stock 
represented  by  shares "  should  not  be  held  to 
qualify  merely  the  words  "  joint  stock  company 
or  association/'  and  not  the  preceding  word, 
"  corporation."  * 

§  22.  "  Labor  Organizations."  —  It  seems  that 
this  exception  2  was  intended  in  favor  of  trade- 
unions,  and  similar  organizations  of  laboring  men 
for  the  purpose  of  promoting  the  welfare  of  their 
class.3  As  a  rule,  they  could  not  be  said  to  be 
"  organized  for  profit ";  and  they  certainly  rarely 
or  never  have  a  "  capital  stock  represented  by 
shares."  Hence  if  only  such  corporations  as  are 
organized  for  profit  with  a  capital  stock  divided 
into  shares  are  subject  to  the  Act,  the  express 
exception  of  labor  organizations  seems  quite 
unnecessary. 

§  23.     "  Agricultural  or  Horticultural  Orgauiza- 

1  See  supra,  §  17. 

2  Act,  Par.  1,  lines  36-37  (infra  Appx.  I). 

3  See  18  Am.  &  Eng.  Enc.  of  Law,  2nd  ed.,  80-81,  tit. 
"  Labor  Organizations  ";  24  CYC.  816-817.    In  neither  place 
are  any  references  given  to  any  judicial  decisions  on  the 
point,  which  seem  to  be  wholly  lacking. 


26  FEDERAL  CORPORATION  TAX  LAW. 

tions."  —  These  words  l  are  probably  intended  to 
exclude  from  the  operation  of  the  Act  any  organiza- 
tion of  farmers  for  the  purpose  of  mutual  con- 
sultation and  assistance.2  Perhaps,  also,  they  have 
the  effect  of  exempting  corporations  formed  for 
the  purpose  of  promoting  agriculture  by  means  of 
county  fairs,  and  thelike.  The  collo  cation  with  labor 
organizations  would  seem  to  indicate  that  Congress 
had  in  mind  organizations  of  farmers  and  horti- 
culturists similar  in  character  to  labor  organizations. 
§  24.  Fraternal  Beneficiary  Societies  Operating 
under  the  Lodge  System,  and  Providing  for  the 
Payment  of  Life,  Sick,  Accident,  and  other  Benefits 
to  Members  or  Dependents  of  Members.  —  The 
classes  of  corporations  here  intended  3  are  desig- 
nated with  clearness; 4  but  as  they  are  never 
formed  with  a  capital  stock,  they  would  not,  even 
without  the  express  exception,  be  subject  to  the 
Act,  unless  the  narrower  application  of  the  words 
"  having  a  capital  stock  represented  by  shares  " 
is  the  true  meaning. 

1  Act,  Par.  1,  lines  36-37  (infra  Appx.  I). 

2  For  judicial  definitions  of  an  agricultural  society,  see 
1  Words  and  Phrases  Judicially  Defined,  288,  tit.,  "  Agricul- 
tural Societies." 

3  Act,  Par.  1,  lines  37-43  (infra  Appx.  I). ' 

4Cf.  National  Union  v.  Marlow,  74  Fed.  775;  21  C.  C.  A. 
89;  13  Am.  &  Eng.  Enc.  of  Law,  2nd  ed.,  1043-1045,  tit. 
"  Benevolent  or  Beneficial  Associations  ";  Bacon  on  Benefit 
Societies,  3rd  ed.,  §  1  et  seq.;  29  CYC.  7-11,  tit.,  "  Mutual 
Benefit  Insurance";  1  Words  and  Phrases  Judicially  De- 
fined, 748,  tit.  "  Beneficial  Associations." 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    27 

§  25.  Building  and  Loan  Associations.  —  Only 
"  domestic "  building  and  loan  associations  are 
expressly  excepted.1  That  word  is  evidently  used, 
not  as  opposed  to  "  foreign,"  but  as  confining  the 
exception  to  such  associations  as  have  for  their 
chief,  if  not  their  only,  object,  the  lending  of 
money  for  the  purpose  of  enabling  the  borrower  to 
acquire  a  home.  The  meaning  of  the  words, 
"  building  and  loan  associations/'  is  sufficiently 
well  understood  in  the  law  as  to  call  for  no  com- 
ment. 2  In  order,  however,  to  be  within  the  express 
exception,  a  building  and  loan  association  must 
be  organized  and  operated  exclusively  for  the 
mutual  benefit  of  members. 

§  26.  Religious,  Charitable,  or  Educational  Cor- 
porations. —  In  order  to  be  within  this  exception,3 
it  is  necessary  that  a  corporation  be  organized 
exclusively  for  the  purposes  mentioned.  No  such 
corporation  could  be  regarded  as  "  organized  for 
profit";  and  few  such  corporations  have  a  capi- 
tal stock.  The  necessity  of  the  express  exception 
is,  therefore,  not  easy  to  see.  However,  it  per- 
haps removes  a  doubt  —  probably  unfounded,4  — 

1  Act,  Par.  1,  lines  43-45  (infra  Appx.  I). 

2  For  definitions  see  6  CYC.  120.  tit.  "  Building  and  Loan 
Societies." 

3  Act,  Par.   1,  lines  46-50. 

4  See  McLeod  v.  Lincoln  Medical  College,  (Neb),  96  N.  W., 
265,   266;    Santa  Clara  Female  Academy  v.  Sullivan,    116 
111.,  375,  387-388;  6  N.  E.  183;  56  Am.  Rep.  776;  McDonald 
v.  Mass.  Gen.  Hospital  120  Mass.  432;    21  Am.  Rep.  529 


28  FEDERAL   CORPORATION"  TAX  LAW. 

whether  an  educational  corporation  is  converted 
into  a  business  corporation  merely  because  it 
makes  a  charge  for  tuition.  "  Charitable "  in 
such  a  connection  is  not  used  in  the  popular  mean- 
ing of  relief  from  poverty,  but  in  the  broade* 
signification  it  has  acquired  in  English  law.1  A 
religious  corporation  is  one  formed  for  the  purpose 
of  worshipping  God,  and  propagating  the  faith.2 
§  27.  Line  of  Demarkation  between  Foreign 
Companies  and  Domestic  Companies.  —  The  line 
drawn  in  the  Act  between  foreign  and  domestic 
companies  is  between  companies  "  organized  under 
the  laws  of  any  foreign  country  "  on  the  one  hand,3 
and  companies  "  organized  under  the  laws  of  the 
United  States,  or  of  any  State  or  Territory  of  the 

(hospital  requiring  its  patients  to  pay  for  their  board) ;  Rex 
v.  Special  Commissioners,  98  L.  T.  446. 

1  Commissioners  for  Income  Tax  v.  Pemsel  (1891),  A.  C. 
531;  Rex  v.  Special  Commissioners,  98  L.  T.  446.  As  to 
what  are  charitable  purposes,  see  further,  St.  Andrew's 
Hospital  v.  Shearsmith,  19  Q.  B.  D.  624;  Paddington  Burial 
Board  v.  Commissioners  of  Inland  Revenue,  13  Q.  B.  D. 
9;  People  v.  Neff,  34  N.  Y.  App.  Div.  83;  12  Am.  &  Eng. 
Enc.  of  Law,  2nd  ed.,  337,  tit.,  "  Exemptions  from  Taxation  "; 
2  Words  and  Phrases  Judicially  Defined,  1074,  et  seq.,  titles, 
"Charitable  Institutions"  and  "  Charity";  Grove  v. 
Young  Men's  Christian  Ass'n,  88  L.  T.  696  ( Y.  M.  C.  A.  main- 
taining a  restaurant  liable  to  tax  on  profits  thereof). 

2Baltzell  v.  Church  Home  and  Infirmary,  73  All.  151; 
110  Md.  244.  See  also  7  Words  and  Phrases  Judicially  De- 
fined, 6063-6068,  titles,  "  Religion  "  to  "  Religious  Worship," 
inclusive. 

8  Act,  Par.  1,  lines  9-10  (infra  Appx.  I). 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    29 

United  States,  or  under  the  Acts  of  Congress 
applicable  to  Alaska  or  the  District  of  Columbia/' 
on  the  other  hand,.1  Do  these  two  classes  together 
embrace  all  conceivable  companies,  or  may  there 
be  a  tertium  quid,  which  is  included  in  neither? 
It  is  clear  that  a  corporation  formed  under  the 
laws  of  Porto  Rico,  or  of  the  Philippine  Islands, 
is  not  "  organized  under  the  laws  of  any  foreign 
country  "; 2  but  on  the  other  hand,  is  it  within 
the  class  of  domestic  companies  as  defined  in  the 
Act?  The  express  mention  of  Alaska  and  the 
District  of  Columbia  would  seem  by  inference  at 
least  to  exclude  the  Insular  Possessions,3  and 
indeed  they  can  hardly  be  regarded  as  "  terri- 
tories "  of  the  United  States. 

The  same  question  as  to  the  meaning  of  the 
words,  "  the  United  States  and  its  Territories, 
Alaska  and  the  District  of  Columbia,"  which  are 

1  Act,  Par.  1,  lines  5-8  (infra  Appx.  I). 

2  Dooley  v.  United  States,  182  U.  S.  222;  21  Sup.  Ct.  Rep. 
762;  DeLima  v.  Bidwell,  182  U.  S.  1;  21  Sup.  Ct.  Rep.  743; 
Ponce  v.  Roman  Catholic  Church,  210  U.  S.  296,  309;  Dooley 
v.  United  States,  183  U.  S.  151;   22  Sup.  Ct.  Rep.  62;  Four- 
teen Diamond  Rings,  183  U.  S.  176;    22  Sup.  Ct.  Rep.  59; 
Lincoln  v.  United  States,  197  U.  S.  419;  25  Sup.  Ct.  Rep.  455. 

3  The  first  section  of  the  Act  of  Aug.  5,  1909,  c.  6,  of  which 
the  corporation  tax  provisions  constitute  the  thirty-eighth 
section,  refers  to  articles  "  imported  from  any  foreign  country 
into  the  United  States,  or  any  of  its  possessions,  except  the 
Philippine  Islands,  and  the  Islands  of  Guam  and  Tutuila." 
Section  5  refers  to  "  articles  coming  into  the  United  States 
from  the  Philippine  Islands." 


30  FEDERAL  CORPORATION   TAX 'LAW. 

frequently  repeated,1  will  constantly  recur.  It 
is  now  mentioned  once  for  all,  and  will  not  again 
be  referred  to. 

§  28.  What  is  "  Engaged  in  Business  in  the 
United  States."  —  No  foreign  company  is  subject 
to  the  tax  unless  it  is  "  engaged  in  business  "  in 
the  United  States,  including  the  territories,  Alaska 
and  the  District  of  Columbia; 2  it  is  not  enough 
that  it  may  have  "  capital  invested "  in  this 
country,3  although  if  it  be  doing  business,  the  Act 
purports  to  tax  it  upon  the  income  derived  from 
capital  invested  in  the  United  States,  as  well  as 
from  business  transacted  therein.  The  meaning  of 
these  words,  "  engaged  in  business/'  is  almost 
certainly  the  same  as  that  of  the  words,  "  doing 
or  carrying  on  business/ '  in  statutes  regulating 
service  of  process  on  foreign  corporations  doing 
business  in  a  state,4  or  prohibiting  foreign  corpora- 
tions from  doing  business  in  the  state,  except  upon 
compliance  with  certain  conditions.  Although 
there  is  some  conflict  of  authority  as  to  the  con- 
struction of  such  statutes,  yet  in  the  main  there 
is  a  substantial  agreement  between  the  various 

1  Act,  Par.  1,  lines  28-30;    Par.  2,  lines  48-50,  53-55,  60- 
62,  77-79;   Par.  3,  lines  48-50,  68-70,  84-86,  112-114.    Com- 
pare also  the  expression,  "  of  the  United  States  or  of  any 
state  or  territory  thereof."    Act,  Par.  2,  lines  32-34,  83-84. 

2  Act,  Par.  1,  lines  10-12  (Appx.  I). 

3  Cf.  People  v.  Campbell,  138  N.  Y.  543,  546;    34  N.  E. 
370;  20  L.  R.  A.  453;  People  v.  Am.  Bell  Tel.  Co.,  117  N.  Y. 
241;   22  N.  E.  1057. 

4  Cf.  Mutual  Life  Ins.  Co.  v.  Speatley,  172  U.  S.  602, 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    31 

courts  of  this  country.1  It  must  be  remembered, 
however,  that  inasmuch  as  the  federal  courts  follow 
the  state  courts  as  to  the  construction  to  be  given 
to  the  words  "  doing  business  within  the  state  " 
in  a  state  statute,2  decisions  of  the  federal  courts 
construing  those  words  in  a  state  statute  must  not 
too  readily  be  accepted  as  controlling  authority 
as  to  the  construction  of  this  Act  of  Congress. 
Almost  precisely  the  same  question  that  arises 
under  this  statute  has  come  up  in  England  under 
a  statute  subjecting  to  income  tax  any  person 
who  '  exercises  a  trade '  in  the  United  Kingdom.3 

1  When  the  facts  are  disputed,   the  question  must,   of 
course,  in  actions  at  law,  be  left  to  the  jury,  under  proper 
instructions  by  the  Court:    Audenried  v.  East  Coast  Milling 
Co.,  124  Fed.  697;   Oakland  Sugar  Mill  Co.  v.  Wolf  Co.,  118 
Fed.  239;  55  C.  C.  A.  193. 

2  Erie  Ry.  Co.  v.  Pennsylvania,  21  Wall.  492,  497  (head- 
note  inadequate). 

3  Grainger  v.  Gough  (1896),  A.  C.  325;    Lovell  &  Christmas 
v.  Commissioner  of  Taxes  (1908),  A.  C.  46  (as  to  a  similar 
New  Zealand    statute,  the  court  saying:    "  The   trade    or 
business  in  question  in  such  cases  ordinarily  consists  in  making 
certain  classes  of  contracts  and  in  carrying  those  contracts 
into  operation  with  a  view  to  profit,  and  the  rule  seems  to 
be  that  where  such  contracts,  forming  as  they  do  the  essence 
of  the  business  or  trade,  are  habitually  made,  there  a  trade 
or  business  is  carried  on  within  the  meaning  of  the  Income 
Tax  Acts,  so  as  to  render  the  profits  liable  to  income  tax.") 
Watson  v.  Sandie  (1898),  1  Q.  B.  326  (goods   sold  in   his 
own  name  by  agent    for    foreign  principal,  who  was  held 
liable  to  income  tax  on  the  profits  of  the  transaction  as 
exercising  a  trade  in  the  United  Kingdom);   Werle  &  Co.  v. 
Colquhoun,  20  Q.  B.  D.  753 ;  Pommery  v.  Apthorpe,  56  L.  J. 


32  FEDERAL   CORPORATION  TAX  LAW. 

A  mere  isolated  transaction  is  not  doing  business 
within  the  state:  there  must  be  some  course  of 
action,  or  repeated  action  within  the  state,  in 
order  to  constitute  doing  business.1  The  mere 
ownership  of  property  within  the  state  is  certainly 
not  doing  business.2  So  it  would  seem  clear  that 
the  acquisition  of  property  in  the  state,  as  an 
investment,  is  not  doing  business.3  Mere  soliciting 

Q.  B.  155  (French  wine  merchant  held  to  be  taxable  as 
exercising  a  trade  in  England) ;  Tischler  v.  Apthorpe,  52  L.  T. 
N.  S.  814  (a  similar  decision  to  last  case). 

1  Cooper  Mfg.  Co.  v.  Ferguson,  113  U.  S.  727;   5  Sup.  Ct. 
Rep.  739;  Empire  Milling,  etc.,  Co.  v.  Tombstone  Mill,  etc., 
Co.,  100  Fed.  910  (simple  contract  to  pay  a  third  person  for 
exploiting   and   developing  land    owned    by  the   company 
within  the  state  not  doing  business);    Frawley,  Bundy  & 
Wilcox  v.  Pennsylvania  Casualty  Co.,  124  Fed.  259  (writing 
four  policies  in  the  state  for  residents  thereof,  and  collecting 
a  single  premium  through  a  bank  therein,  not  doing  business 
by  an  insurance  company);    Clews  v.  Woodstock  Iron  Co., 
44  Fed.  31  (executing  mortgage,  and  procuring  listing  of  its 
securities  on  the  stock  exchange);  St.  Louis  Wire-Mill  Co., 
32  Fed.  802  (occasional  purchases  of  material);    Good  Hope 
Co.  v.  Railway  Barb  Fencing  Co.,  22  Fed.  635  (president  going 
into  state  to  adjust  controversy  growing  out  of  occasional 
purchases  of  materials);  Grainger  v.  Gough  (1896),  A.  C.  325, 
343  (per  Lord  Morris,  in  respect  to  liability  to  income  tax). 

2  Empire  Milling,  etc.,  Co.  v.  Tombstone  Mill,  etc.,  Co.,  100 
Fed.  910  (stated  supra);  United  States  v.  Am.  Bell  Tel.  Co., 
29  Fed.  17. 

8  Sullivan  v.  Sheehan,  89  Fed.  247  (lending  money  on 
security  of  property  in  the  state  not  doing  business  therein) ; 
Caesar  v.  Capell,  83  Fed.  403  (similar  point) ;  Eastern  Bldg. 
Ass'n.  v.  Bedford,  88  Fed.  7  (similar  point);  Gilchrist  v. 
Helena,  etc.,  R.  Co.,  47  Fed.  593  (foreign  trust  company  pur- 


WHAT  COMPANIES  ARE  SUBJECT  TO   THE  TAX.     33 

of  contracts  by  travelling  agents  has  been  held  not 
to  be  doing  business.1  Making  of  contracts  by 
correspondence  with  a  resident  of  a  state  and 
relating  to  property  therein  is  not  doing  business 
in  that  state.2  On  the  other  hand,  it  seems  that 
the  collection  of  premiums  upon  policies  previously 
written  in  the  state  amounts  to  doing  business 
therein.3  Maintenance  of  ticket-office  by  a  railway 
company,  especially  when  coupled  with  the  running 
of  through  trains  over  the  tracks  of  another  com- 
pany, is  doing  business.4  When  a  company  by  a 

chasing  mortgage  bonds  of  domestic  railway,  and  acting 
as  trustee  of  the  mortgage) . 

But  see  Santa  Clara  Female  Academy  v.  Sullivan,  116 
111.  375,  384;  6  N.  E.  183;  56  Am.  Rep.  776  (semble). 

1  Boardman  v.  McClure  Co.,  123  Fed.  614;  Davis  &  Rankin 
etc.  Co.  v.  Dix,  64  Fed.  406  (sales  through  travelling  salesmen) ; 
Grainger  v.  Gough  (1896),  A.  C.  325  (foreign  wine-merchant 
not  liable  to  income  tax  as  exercising  a  trade  in  the  United 
Kingdom  where  an  agent  solicits  orders  which  are  transmitted 
to  the  principal's  foreign  residence  and  there  accepted  — 
a  decision  with  which  Werle  &  Co.  v.  Colquhoun,  20  Q.  B.  D. 
753,  should  be  compared). 

But  see  Turner  v.  Evans,  2  E.  &  B.  512  (wine  merchant 
systematically  soliciting  orders  in  a  certain  county  held 
to  have  violated  a  contract  not  to  carry  on  business  therein) ; 
Brampton  v.  Beddoes,  13  C.  B.  N.  S.  538  (a  similar  decision, 
where  defendant  had  sold  to  customers  within  the  prohibited 
territory  at  their  own  solicitation). 

2  Hazeltine  v.  Mississippi  Val.  Fire  Ins.  Co.,  55  Fed.  743. 

3  Mutual  Life  Ins.  Co.  v.  Spratly,  172  U.  S.  602.     But  see 
Frawley,  Bundy  &  Wilcox  v.  Pennsylvania  Casualty  Co.,  124 
Fed.  259  (stated  supra). 

4  Norton  v.  Atchison  etc.  R.  Co.,  61  Fed^  618;  Van  Dresser 
v.  Oregon  Ry.  etc.  Co.,  48  Fed.  202. 


34  FEDERAL  CORPORATION  TAX  LAW. 

salaried  representative  in  New  Zealand  solicited 
and  obtained  consignments  of  goods  to  it  in  Lon- 
don to  be  sold  on  commission,  it  was  held  that  no 
business  was  transacted  in  New  Zealand,  or  that 
at  all  events,  the  profits  made  as  commission  on 
the  sales  in  London  could  not  be  deemed  to  have 
arisen  from  business  carried  on  in  New  Zealand.1 

But  for  a  full  discussion  of  this  question,  the 
reader  is  referred  to  treatises  on  the  law  of  foreign 
corporations.2 

§  29.  Corporations  Organized  or  Dissolved 
within  the  Year,  etc.  —  The  First  Paragraph  of  the 
Act  imposes  the  tax  on  all  domestic  corporations 
and  companies  of  the  classes  specified,  "  now  or 
hereafter  organized,"  3  and  on  foreign  companies 
"  now  or  hereafter  organized  and  engaged  in 
business  "  in  the  United  States.4  It  would  seem 
therefore  that  a  corporation  which  had  been  dis- 
solved before  the  Act  took  effect,  —  that  is,  before 
August  5th,  1909,5  —  would  not  be  subject  to 
tax,  even  though  it  might  have  transacted  some 
business,  and  earned  some  income  prior  to  that 
date. 6  So,  too,  a  foreign  company  which  had  ceased 
to  do  business  in  this  country  before  August  5th, 

1  Lovell  &  Christmas  v.  Commissioner  of  Taxes    (1908), 
A!  C.  46. 

2  Beale  on  Foreign  Corps.,  §  204-§  209. 

3  Act,  Par.  1,  lines  4-5  (infra  Appx.  I). 

4  Act,  Par.  1,  lines  10-12  (infra  Appx.  I). 

5  See  Act,  §  42  (infra  Appx.  I).  t 

9  It  is  to  be  observed  that  by  §  42  of  the  Act  (infra  Appx.  I) 


WHAT  COMPANIES  ARE  SUBJECT  TO  THE  TAX.    35 

1909,  would  escape  all  the  burdens  of  the  Act. 
On  the  other  hand,  if  a  domestic  corporation  is  in 
existence  for  even  a  day  after  August  5th,  1909, 
or  if  a  foreign  company  does  business  in  this 
country  for  even  a  day  after  that  date,  perhaps  it 
becomes  liable  to  the  tax  imposed  on  its  net 
income  for  the  entire  year  1909,1  and  cannot  escape 
the  tax  by  dissolving,  or  ceasing  to  do  business 
before  the  end  of  the  year.2  On  the  other  hand, 
the  Act  furnishes  no  machinery  for  assessment  of 
the  tax  against  dissolved  corporations.  For  in- 
stance, a  dissolved  corporation  can  have  no  chief 
officer  and  no  treasurer  or  assistant  treasurer; 
and  without  such  officers,  who  is  to  make  the 

it  is  expressly  provided  that  the  "  Act  shall  take  effect  on 
the  day  following  its  passage." 

Note,  however,  that  by  Rev.  Stats.  §  5  (1  U.  S.  Comp.  Stats. 
p.  4),  the  word  "  company  "  or  "  association,"  when  used 
in  an  Act  of  Congress  in  reference  to  a  corporation,  shall  be 
deemed  to  embrace  the  words  "  successors  and  assigns  of 
such  company  or  association,"  in  like  manner  as  if  these 
last-named  words,  or  words  of  similar  import,  were  expressed. 

1  But  see  Spreckels  Sugar  Ref.  Co.  v.  McClain,  109  Fed., 
76,  79,  reversed   on  other  points,  113  Fed.  244;    192  U.  S. 
397;  Commonwealth  v.  Lancaster  Sav.  Bank,  123  Mass.  493 
(banking  corporation  which  is  in  hands  of  receiver  and  per- 
petually enjoined  from  transacting  business  on  November  1st 
not  liable  to  a  franchise  or  business  tax  for  the  preceding  six 
months,  measured  by  its  average  deposits  during  that  period, 
although  it  had  transacted  business  within  that  term) . 

2  Cf.  Mandell  v.  Pierce,  3  Cliff.  135  (as  to  the  liability  of 
an  executor  for  income  tax,  when  the  testator  dies  within 
the  year).    As  to  the  constitutionality  of  this  feature  of  the 
Act,  see  infra  §  148.    See  also  infra  §  39. 


36  FEDERAL  CORPORATION  TAX  LAW. 

return  on  its  behalf?  And  without  a  return,  how 
is  the  tax  to  be  assessed?  For  it  would  seem 
difficult  to  hold  that  a  corporation  which  had  ceased 
to  exist,  and  therefore  could  not  make  the  return, 
is  to  be  treated  as  in  default  for  not  doing  so;  and 
unless  it  is  in  default,  the  Commissioner  of  Internal 
Revenue  has  no  authority  to  prepare  a  return  on 
its  behalf. 

Corporations  which  are  organized  after  the  Act 
goes  into  effect,  and  within  the  year,  and  foreign 
companies  which  within  that  period  begin  business 
in  this  country,  are  clearly  subject  to  the  tax. 

The  Commissioner  of  Internal  Revenue  has 
ruled  that,  "  Corporations  organized  during  the 
year,  or  going  into  liquidation  during  the  year, 
should  nevertheless  render  a  sworn  return  on  the 
prescribed  form."  1 

1  U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  3rd,  1909  (Infra 
Appx.  II). 


CHAPTER   IV 

HOW    THE    TAXABLE    INCOME    IS    CALCULATED 

§  30    In  general. 

§  31     Income  distinguished  from  profits. 

§  32    Statutory    provisions   as   to   method   of    calculation 

mandatory. 
§§  33-44 A  What  to  be  included  as  "  the  gross  amount  of  the 

income." 

§  33         In  general. 

§  34        Dividends  on  stock  held  in  other  companies. 
§  35        Increase  in  value  of  property  —  sale  of  capital  sets. 
§  36  Purchase  price  payable  by  instalments. 

§  37        Force  of  the  word  "  received  "  in  "  gross   amount 

of  income  received  "  in  Paragraph  2  of  the  Act. 
§  38        Income  received  as  trustee. 
§  39        Income  received  before  passage  of  the  Act. 
§  40         Income  derived  from  property  exempt  from  taxation. 
§  41         Income  derived  from  land. 
§  42        Income  from  invested  personal  property. 
§  43        What    is   income    from    business  as  distinguished 

from  investments. 

§  44         Income  from  ultra  vires  business. 
§  44A     Income  from  foreign  business  and  property. 
§§  45-74  Deductions  to  be  made  from  gross  income. 
§  45        Is  statutory  list  of  deductions  exhaustive? 
§§  46—52  Maintenance  and  operation. 
§  46  The  provision  in  general. 

§  47  What   is  maintenance    and  operation,  —  in  gen- 

eral. ( 
§  48          (  Maintenance  of  property. 


38  FEDERAL  CORPORATION  TAX  LAW. 

§  49  Expenses    "  actually   paid  "  —  meaning    of   the 

expression. 
§  50  Necessity   that   expenses  should  have  been  paid 

"  out  of  income  "  in  order  to  be  deducted. 
§  51  Meaning  of  "  ordinary  and  necessary  "  expenses. 

§  52  Charges  such  as  rentals  and  franchise  payments. 

§§  53-59     Deductions  for  losses. 
§  53  Necessity  for  an  express  provision  of  law  allowing 

such  deductions. 
§  54  Meaning  of  "  losses." 

§  55  Loss  must  be  "  sustained  within  the  year." 

§  56  Must  be  "  not  compensated  by  insurance  or  other- 

wise." 

§  57  Depreciation  of  property. 

§§  58-59    Deductions  by  insurance  companies. 
§  58  "  Sums   other     than  dividends    paid  with   the 

year  on  policy  and  annuity  contracts." 
§  59  Additions  to  reserve  funds. 

§§  60-67  Deductions    for    indebtednessor    interest   thereon. 
§  60        The  provision  in  general. 
§  61         Limitation    on  amount  of  indebtedness  —  what  is 

"  the  paid-up  capital  stock." 
§  62        As    of  what  date   amount  of  capital  stock  and  of 

indebtedness  is  to  be  taken. 
§  63         Force    of    the    word    "  Outstanding "    in    capital 

stock  outstanding  at  the  close  of  the  year. 
§  64         Indebtedness  of  non-stock  corporations. 
§  65        Indebtedness  in  excess  of  the  paid-up  capital. 
§  66         Money  used    in  paying   principal    of   debts  —  Mo- 
neys added  to  sinking  funds. 
§  67        Interest  on  bank  deposits. 
§§  68-70    Deductions  for  taxes. 
§  68        In  general. 

§  69        Special  assessments  for  betterments. 
§  70        Foreign  taxes. 

§§  71-74     Dividends  on  shares  in  other  companies. 
§  71         In  general. 


HOW   THE  TAXABLE   INCOME   IS   CALCULATED.     39 

§  72  On  shares  in  companies  whose  net  income  is  less 
than  five  thousand  dollars. 

§  73         On  shares  in  foreign  companies. 

§  74        Meaning  of  "  Dividends  "  in  this  connection. 

§§  75-84  Method  of  calculating  taxable  income  of  foreign 
companies. 

§  75        In  general. 

§  76  Gross  income  "  from  business  transacted  and  capi- 
tal invested  in  the  United  States." 

§  77  How  to  apportion  profits  between  that  part  of  busi- 
ness transacted  in  the  United  States  and  that 
part  transacted  abroad. 

§  78  What  is  income  from  "  capital  invested  in  the 
United  States." 

§§  79-84  Deductions  from  gross  income  by  foreign  com- 
panies. 

§  79  In  general. 

§  80  Operating  expenses  of  foreign  companies. 

§  81  Losses  by  foreign  companies. 

§  82  Interest  on  indebtedness  paid  by  foreign  com- 

panies. 

§  83  Taxes  paid  by  foreign  companies. 

§  84  Dividends  on  shares  in  other  companies  held  by 

foreign  companies. 

§  84A   For  what  period  income  is  calculated. 

§  30.  In  General.  —  Inasmuch  as  the  tax  is 
either  a  tax  upon  income  or  at  any  rate  is  graduated 
with  reference  to  income,  it  is  next  pertinent  to 
inquire  how  the  income  is  to  be  calculated  for  the 
purposes  of  the  tax.  The  Act  of  Congress  contains 
full,  though  perhaps  not  exhaustive  nor  exclusive, 
directions  as  to  the  method  to  be  followed  in  this 
process  of  calculation. 

§  31.    Income  Distinguished  from  Profits.  —  The 


40  FEDERAL  CORPORATION  TAX  LAW. 

matter  to  be  ascertained  by  this  process  is  net 
income,  not  profits.  The  two  terms  are  not 
synonymous.1  For  instance,  where  the  company's 
fixed  capital 2  has  increased  in  value,  the  increment 
may  be  regarded  as  profits  and  may  be  distributed 
as  dividends; 3  but  it  is  not  income  and  would  not 
be  liable  to  tax  under  the  present  law.4  Even  if 
there  were  no  directions  in  the  Act  as  to  the  mode 
of  ascertaining  profits,  this  would  be  true.  A  for- 
tiori  the  mere  fact  that  the  company's  assets  may 
exceed  in  value  the  sum  of  its  liabilities  and  out- 
standing paid-up  capital,  although  the  excess  is 
deemed  profits  and  as  such  is  distributable  as  divi- 
dends, has  no  tendency  to  show  the  existence  of 
"  net  income  "  in  proportion  to  which  this  tax  is 

1  It   is   submitted    that  the   Commissioner   of   Internal 
Revenue  is  mistaken  in  his  statement  that  "  gross  income 
is  practically  the  same  as  gross  profits,  the  only  difference 
being  that  gross  income  is  more  inclusive,  embracing  as  it 
does  not  only  gross  profits  of  the  corporation,  joint  stock 
company  and  association  itself,  but  also  all  amounts  of  in- 
come received  from  all  other  sources."     U.  S.  Int.  Rev. 
Regs.  No.  31,  Dec.  3d,  1909,  Art.  2,  §  5  (Infra  Appx.  II). 
So,  "  earnings  "  is  not  synonymous  with  "  profits  ";  Grant  v. 
Hartford,  etc.,  R.  R.  Co.,  93  U.  S.  225,  228. 

2  As  to  the  meaning  of  "  fixed  capital,"  see  2  Machen 
Mod.  Law  of  Corps.,  §  1323. 

3  2  Machen,  Mod.  Law  of  Corps.,  §  1314,  §  1320. 

4  Gray  v.  Darlington,  15  Wall.  63,  66  ("  Mere  advance 
in  value  in  no  sense  constitutes  the  gains,  profits  or  income 
specified  by  the  statute.    It  constitutes  and  can  be  treated 
merely  as  an  increase  of  capital "). 

Cf .  infra  §  35. 


HOW  THE  TAXABLE   INCOME   IS  CALCULATED.     41 

assessed.  In  other  words,  in  order  to  ascertain  the 
amount  of  net  income  for  purposes  of  the  tax,  the 
so-called  single-account  or  balance-sheet  method 
of  ascertaining  the  amount  of  profits  available  for 
dividends  l  must  be  rejected,  and  in  lieu  thereof 
something  resembling  the  double-account  method 
of  calculating  profits  2  must  be  adopted.  The  Act 
of  Congress  recognizes  this  fact,  and  the  method 
prescribed  in  Paragraph  2  of  the  Act  for  ascer- 
taining net  income  will  be  found  to  follow  the 
general  plan  of  the  so-called  double-account  method 
of  ascertaining  profits. 

§  32.  Statutory  Provisions  as  to  Method  of 
Calculation  Mandatory.  —  The  Second  Paragraph 
of  the  Act  prescribes  the  method  of  calculating 
net  income  for  purposes  of  the  tax.  These  statu- 
tory regulations  are  evidently,  so  far  as  they  go, 
mandatory.  The  language  is,  "  Such  net  income 
shall  be  ascertained  "  by  the  method  particularly 
set  out  in  the  statute.  The  statutory  rules  may 
not  be  exhaustive,  but  they  are  certainly  obliga- 
tory and  not  merely  directory.  There  are  certain 
differences  between  the  rules  applicable  to  domestic 
companies  and  those  prescribed  for  foreign  com- 
panies. These  differences  spring  from  the  fact 
that  in  the  case  of  domestic  companies  the  entire 
net  income  in  excess  of  five  thousand  dollars  is 

1  As  to  this  method,  see  2  Machen,  Mod.  Law  of  Corps., 
§  1314-§  1319. 

2  As  to  this  method,  see  2  Machen,  Mod.  Law  of  Corps., 
§ 1320-§1337. 


42  FEDERAL   CORPORATION   TAX  LAW. 

taxed,  while  in  the  case  of  foreign  companies  it 
is  only  so  much  thereof  as  is  derived  from  business 
transacted  and  capital  invested  in  this  country. 
It  will,  therefore,  be  simplest  to  discuss  the  method 
of  calculating  net  profits  in  the  case  of  domestic 
companies,  and  afterwards  to  consider  the  peculiar 
questions  arising  with  respect  to  the  similar  calcula- 
tion in  the  case  of  foreign  companies. 

§  33.  What  is  "  the  Gross  Amount  of  the  In- 
come." —  In  General.  —  Congress  has  provided 
that  the  net  income  shall  be  ascertained  by  making 
certain  deductions  from  "  the  gross  amount  of  the 
income.77  l  The  first  question  is,  what  is  gross 
income.  Upon  this  point  the  Act  is  silent,  so  that 
resort  must  be  had  to  the  general  principles  of  law. 
Income  means  primarily  that  which  comes  in,2  and 
gross  income  is  therefore  the  gross  amount  which 
is  received  by  the  company  during  the  year,  without 
deduction  for  the  outlay  necessary  to  bring  it  in. 
For  a  further  statement  of  what  income  is,  refer- 
ence must  be  made  to  the  treatises  on  the  general 
law  of  corporations.3  In  the  absence  of  affirmative 
statutory  authority  an  assessment  for  income  tax 
must  not  include  the  rental  value  of  premises 
owned  and  actually  occupied  by  the  taxpayer, 

1  Act,  Par.  2,  lines  1-3  (infra  Appx.  I). 

2  For    full    citation    of    authorities    defining    "  income," 
see  22  CYC.  63  et  seq.,  tit.  "  Income."    C/    Uso  Re  Redding 
(1897),  1  Ch.  876;  Lawless  v.  Sullivan,  6  A.  C.  373. 

3  See  particularly,  2  Machen,  Mod.  Law  of  Corps.,  §  1330, 
§  1334-§  1336. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.     43 

or  even  of  premises  which  he  is  permitted  to 
occupy  rent  free.1  The  mere  fact  that  a  remittance 
to  the  company  from  an  agent  is  described,  or, 
as  Lord  Halsbury  said,  nicknamed,  a  return  of 
capital  is  obviously  not  conclusive,  and  it  seems 
is  not  even  sufficient  to  relieve  the  company  of 
the  burden  of  proving  how  much,  if  any,  of  the 
sum  so  received  is  capital.2  As  Lord  Halsbury 
put  it,  the  company  virtually  say  to  their 
agents,  " '  Whenever  you  send  money  to  this 
country,  do  not  find  out  what  in  strictness  is  the 
difference  between  capital  and  income,  but  describe 
whatever  you  send  back  to  us  as  repayment  of 
capital  —  take  care  you  do  not  describe  it  as 
interest/  "  3 

§  34.  Dividends  on  Stock  Held  in  Other  Com- 
panies. —  Dividends  on  stock  of  other  companies 
held  by  the  tax-paying  company  may  or  may  not 
be  income;  this  question  often  arises  as  between 
a  tenant  for  life  and  a  remainderman,  where  shares 
are  held  in  trust,4  and  it  would  seem  that  no 
dividend  should  be  held  to  be  taxable  as  income 
of  a  shareholding  company  unless  it  would  be 
payable  to  a  tenant  for  life  of  the  shares.5  In 

1  Tennant  v.  Smith  (1892),  A.  C.  150. 

2  Scottish  Provident  Ass'n  v.  Allan  (1903),  A.  C.  129. 

3  (1903),  A.  C.  135. 

4  See  2  Machen,  Mod.  Law  of  Corps.,  §  1377-§1396. 

5Cf.  Merchants1  Ins.  Co.  v.  McCartney,  1  Lowell  447 
(holding  that  so  much  of  a  dividend  as  represented  profits 
earned  before  the  income-tax  law  went  into  effect  was  not 
taxable  as  income  of  the  holding  company;  but  to  be  com- 


44  FEDERAL   CORPORATION   TAX   LAW. 

connection  with  the  present  Act,  the  question 
cannot  arise  except  where  a  domestic  company 
holds  stock  in  a  foreign  company,  for  all  dividends 
on  stock  of  domestic  companies  are  exempt.1 
The  fact  that  a  domestic  company  owns  shares, 
even  all  the  shares,  of  a  foreign  company  does  not 
make  the  business  of  the  foreign  company  the 
business  of  the  domestic  company,  so  as  to  subject 
the  domestic  company  to  tax  on  the  income  of 
the  foreign  company  unless  it  be  used  to  declare 
and  pay  a  dividend.2  The  Act,  contemplates, 
however,  that  dividends  on  the  stock  of  all  other 
companies  —  at  any  rate  such  dividends  as  amount 
to  income  rather  than  capital  —  shall  be  returned 
as  part  of  the  gross  income  although  they  are  to 
be  off-set,  in  the  case  of  other  companies  which 
are  subject  to  the  tax,  by  a  credit  or  deduction 
of  an  equa^ amount.3 

§  35.  Increase  in  Value  of  Property.  —  Sale  of 
Capital  Assets.  —  It  has  been  shown  above  that 

pared  with  Gibbons  v.  Mahon,  136  U.  S.  549;  10  Sup.  Ct. 
1057);  Reynolds  v.  Williams,  4  Biss.  108  (a  somewhat  similar 
case  in  principle  to  Merchants'  Ins.  Co.  v.  McCartney,  ubi 
supra). 

1  Cf.  infra  §  71,  et  seq. 

2  Gramophone  &  Typewriter  v.  Stanley  (1908),  2  K.  B. 
89;    Kodak,  Ltd.  v.  Clark  (1903),  1  K.  B.  505.     See  also 
2  Machen,  Mod.  Law  of  Corps.,  §  1080. 

But  see  American  Sugar  Ref.  Co.  v.  Rutan,  123  Fed.  979; 
Apthorpe  v.  Peter  Schoenhofen  Brewing  Co.,  80  L.  T.  395; 
St.  Louis  Breweries  v.  Apthorpe,  79  L.  T.  551. 

3  See  infra  §  71-§  74. 


HOW   THE  TAXABLE   INCOME   IS  CALCULATED.     45 

an  increase  in  the  value  of  a  company's  fixed  capi- 
tal is  not  to  be  regarded  as  income  for  the  purpose 
of  the  Act.1  But  what  if  the  capital  is  actually 
sold  during  the  year?  On  principle,  it  is  difficult 
to  see  why  that  fact  should  make  any  difference, 
or  should  convert  any  part  of  the  proceeds  of  sale, 
representing  fixed  capital  sold,  into  income.  Of 
course,  a  sale  of  circulating  capital  —  capital 
which  is  acquired  for  the  purpose  of  making  a 
profit  by  a  sale  thereof  —  would  stand  on  a  wholly 
different  footing;  for  in  such  a  case  the  difference 
between  the  purchasing  price  and  the  selling  price 
is  undoubtedly  income.  But  where  a  company  for 
reasons  of  convenience,  or  for  liquidation,  or  for 
any  other  reason,  makes  a  sale  of  fixed  capital,  the 
case  is  wholly  different.  For  example,  suppose  a 
mercantile  company  should  desire  to  move  its 
store  from  one  location  to  another,  and  with  that 
object  in  view  should  sell  its  old  store.  It  is  sub- 
mitted that  in  such  a  case  the  fact  that  a  good 
price  may  be  realized  —  more  than  the  company 
paid  for  the  property,  or  more  than  it  was  worth 
at  the  beginning  of  the  year,  —  is  no  reason  what- 
ever for  treating  that  excess  as  income.2 

Nevertheless,  the  Commissioner  of  Internal 
Revenue  in  his  regulations  recently  promulgated 
has  laid  down  the  rule  broadly  that  in  the  case  of 
a  sale  of  capital  assets,  the  excess  of  the  selling 

1  Supra  §31. 

2  Gray  v.  Darlington,  15  Wall.  63.    But  see  United  States 
v.  Smith,  1  Sawy.  277. 


46  FEDERAL   CORPORATION   TAX   LAW. 

price  over  the  value  at  the  beginning  of  the  year, 
or,  if  the  property  was  bought  after  the  beginning 
of  the  year,  over  the  buying  price,  is  to  be  treated 
as  income.1  It  would  seem,  however,  that  for  the 
reasons  just  indicated,  this  ruling  disregards  the 
distinction  between  different  kinds  of  capital,  and 
ought  to  be  revised  by  the  Commissioner.  It  is 
also  believed  that  if  the  question  shall  be  taken 
to  court,  this  ruling,  if  it  shall  be  adhered  to  by  the 
Gommissioner,  would  be  reversed;  for  he  seems  to 
have  overlooked  an  express  decision  of  the  Supreme 
Court.2 

§  36.  Purchase  Price  Payable  by  Instalments.  - 
Under  the  British  income-tax  statutes,  the  courts 
will,  in  any  case  of  a  sale,  or  ostensible  sale,  of 
capital  assets,  where  the  purchase  price  is  payable 
by  instalments,  look  through  the  form  of  the 
transaction  and  ascertain  how  much  of  each  instal- 
ment is  in  substance  interest  and  therefore  liable 
to  income  tax,  and  how  much  is  in  substance  a 
mere  deferred  payment  of  principal  and  as  such 
free  of  tax.3  In  one  case  of  an  ostensible  purchase 
of  a  lease  by  a  sub-lessee,  it  was  even  held  that  the 
full  amount  of  the  deferred  payments  represented, 
in  substance,  rent  reserved  on  the  sub-lease  and 

1  U.  S.  Int.  Rev.  Regs.  No.  31,  Dec.  3d,  1909,  Art.  2,  §  5 
(infra  Appx.  II). 

2  Gray  v.  Darlington,  15  Wall.  63. 

3  East  Indian  Ry.  Co.  v.  Secretary  of  State  (1905),  2  K.  B. 
413;    Secretary  of  State  v.  Scoble  (1903),  A.  C.  299.     Cf. 
Foley  v.  Fletcher,  3  H.  &  N.  769  (income  tax  held  not  payable 
on  the  deferred  instalments). 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.     47 

was  therefore  liable  to  tax.1  The  phraseology  of 
the  British  statutes,  on  which  these  cases  turn, 
is  very  different  from  that  of  the  Act  of  Congress; 
but  nevertheless  our  courts  would  probably,  like 
the  English  courts,  look  through  the  form  of  the 
transaction,  and  apply  the  same  or  a  similar  dis- 
tinction between  interest,  or  income,  and  deferred 
payments  of  principal. 

§  37.  Force  of  Word  "  Received  "  in  "  Gross 
Amount  of  Income  Received  "  in  Paragraph  2  of 
the  Act.  —  It  should  be  observed  that  the  tax  is 
proportioned  to  income  "  received  "  2  during  the 
year.  This  word  would  seem  to  exclude  income 
to  which  the  company  may  be  entitled  but  which 
has  not  been  collected.3  Perhaps,  it  would  be  too 

1  Chadwick  v.  Pearl  Life  Ins.  Co.  (1905),  2  K.  B.  507. 
Cf.  Delage  v.  Nugget  Polish  Co.,  92  L.  T.  682. 

2  Act,  Par.  1,  line  19;   Par.  2,  line  5;   Par.  3,  line  43  (infra 
Appx.  I).     As  to  the  force  of  this  word  in  an  income-tax 
law,  see  Gresham  Life  Ass.  Soc.  v.  Bishop  (1902),  A.  C.  287; 
Colquhoun  v.  Brooks,  14  A.  C.  493;  Bartholomay  Brewing 
Co.  v.  Wyatt  (1893),  2  Q.  B.  499;  Scottish  Provident  Inst.  v. 
Allan  (1903),  A.  C.  129.      This  word  "  received  "  was  not 
contained  in   the  Income-Tax  Law  of  1862  and,  therefore, 
Magee  v.  Denton,  5  Blatchf.  130,  which  was  decided  under 
that  statute,  is  distinguishable.     Cf.  United  States  v.  Schil- 
linger,  14  Blatchf.  71  (promissory  note  not  yet  mature  not 
taxable  as  income,  the  court  saying,   "  In  the  absence  of 
any  special  provision  of  .law  to  the  contrary  income  must  be 
taken  to  mean  money  ") ;  United  States  v.  Smith,  1  Sawy.  277; 
United  States  v.  Frost,  25  Fed.  Cas.  1221  (debts  not  believed 
to  be  good  not  returnable  as  income,  —  a  decision  to  be 
compared  with  United  States  v.  Mayer,  Deady  127). 

3  Cf .  2  Machen,  Mod.  Law  of  Corps.,  §  1335. 


48  FEDERAL   CORPORATION  TAX  LAW. 

broad  a  statement  that  the  Act  contemplates  only 
income  collected  in  cash;  but  at  any  rate  it  does 
seem  to  distinguish  between  estimated  income  and 
actual  receipts.  An  analogous  construction  has 
been  given  to  a  regulation  that  dividends  shall  be 
payable  only  out  of  "  realised  profits."  l 

In  an  English  case,  in  overruling  a  contention 
that  income  had  been  "  constructively  "  received 
for  purposes  of  income  tax  by  an  entry  in  the 
company's  books  without  actual  transmission  of 
money,  Lord  Brampton  said,  "  I  confess  I  do  not 
like  that  expression,  nor  do  I  quite  understand 
what  it  means.  If  a  '  constructive '  receipt  is  the 
same  thing  as  an  actual  receipt,  I  see  no  reason  for 
the  use  of  the  word  '  constructive '  at  all.  If  it 
means  something  different  from  or  short  of  actual 
receipt,  then  it  seems  to  me  that  a  constructive 
receipt  is  not  recognized  by  the  statute,  which  in 
using  the  word  '  received '  alone,  must  be  taken 
to  have  used  it  having  regard  to  its  ordinary 
acceptation."  2  It  would  seem  that  the  Commis- 
sioner of  Internal  Revenue  has  overlooked  the 
force  of  this  word  "  received  "  in  his  promulgated 
regulations  wherein  he  declares  that,  "  It  is  im- 
material whether  any  item  of  gross  income-  is 
evidenced  by  cash  receipts  during  the  year  or  in 
such  other  manner  as  to  entitle  it  to  proper  entry 
on  the  books  of  the  corporation  from  January  1 

1  2  Machen,  Mod.  Law  of  Corps.,  §  1343. 

2  Gresham  Life  Ass.  Soc.  v.  Bishop  (1902),  A.  C.  287,  294. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.     49 

to  December  31  for  the  year  in  which  the  return 
is  made."  1 

§  38.  Income  Received  as  Trustee.  —  An  im- 
portant question  is  whether  income  received  by 
the  company  as  trustee  must  be  included.  The 
general  principle  is  incontrovertible  that  in  the 
absence  of  express  provision  to  the  contrary,  a 
trustee  is  to  be  regarded  for  purposes  of  taxation 
as  though  he  were  the  absolute  owner  of  the 
property,2  as  indeed  he  is  in  a  court  of  law.  The 
trust  relation  is  a  matter  between  him  and  his 
cestuis  que  trust:  as  between  himself  and  the 
government  he  is  the  absolute  owner  of  the  prop- 
erty. There  is  no  provision  in  the  Act  of  Congress 
expressly  excluding  the  application  of  this  prin- 
ciple, and  yet  if  it  is  to  be  applied  the  consequences 
would  be  so  unjust  as  perhaps  to  affect  the  consti- 
tutionality of  the  law. 

Take  the  case  of  a  trust  company  receiving  on 

1  U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  3d,  1909,  Art.  2, 
§  5  (infra  Appx.  II). 

2  Latrobe  v.  Mayor  etc.  of  Baltimore,  19  Md.  13;  Richard- 
son v,  Boston,  148  Mass.  508;    20  N.  E.  166;    Anthony  v. 
Caswell,  15  R.  I.  159,  161;    1  Atl.  290;   Greene  v.  Mumford, 
4  R.  I.  313,  319-320;    Mackay  v.  San  Francisco,  128  Cal. 
678;  61  Pac.  382;  Detroit  v.  Lewis,  109  Mich.  155;  66  N.  W. 
958;   32  L.  R.  A.  439;    Guthrie  v.  Pittsburgh  etc.  Ry.  Co., 
158  Pa.  433;   State  v.  Willard,  77  Minn.  190,  195;   79  N.  W. 
829;   City  of  Lexington  v.  Fishback's  Trustee,  60  S.  W.  727; 
22  Ky.  Law  Rep.  1392;   Cooley  on  Taxation,  3d  ed.,  660. 

But  see  People  v.  Coleman,  119  N.  Y.  137;  23  N.  E.  488; 
7  L.  R.  A.  407;  Borough  of  Carlisle  v.  Marshall,  36  Pa.  St. 
397. 


50  FEDERAL   CORPORATION  TAX  LAW. 

behalf  of  trust  estates  thousands  or  even  millions 
of  dollars  each  year.  Is  all  of  this  income  taxable 
as  income  of  the  trustee?  If  so,  of  course  the 
company  has  a  right  to  be  reimbursed  out  of  the 
trust  property  in  its  hands,  and  the  result  would 
be  that  every  person  whose  estate  is  in  the  hands 
of  a  corporate  trustee  would  be  obliged  to  pay  an 
income  tax  to  the  United  States,  on  the  whole 
amount  of  his  income,  although  individuals  who 
hold  the  legal  title  to  their  property,  and  also 
persons  whose  property  is  in  the  hands  of  individual 
trustees,  pay  no  similar  tax.  It  may  be  said, 
indeed,  that  this  injustice  is  but  little  if  any 
greater  than  the  injustice  which  results  inevitably 
from  the  ordinary  operation  of  the  law;  for  a 
person  who  is  so  unfortunate  as  to  have  his  prop- 
erty invested  in  shares  of  stock  in  corporations 
must  pay  an  income  tax  while  a  person  who  has 
an  equal  or  greater  amount  in  real  estate  or  other 
forms  of  personal  property  goes  entirely  free. 

The  only  specific  clause  in  the  Act  which  can  be 
seized  upon  to  exempt  income  received  by  cor- 
porations as  trustees  is  the  statement  that  the  tax 
is  laid  "  with  respect  to  the  carrying  on  or  doing 
business."  *  Now,  obviously  the  business  of  a 
trust  company  is  acting  as  trustee,  but  the  amount 
of  its  income  from  its  business  is  not  fairly  meas- 
ured by  the  amount  of  income  collected  for  its 
cestuis  que  trust,  but  by  the  amount  of  its  com- 
missions. Possibly,  therefore,  an  intent  can  be 

1  Act,  Par.  1,  lines  14-15  (infra  Appx.  I). 


HOW  THE  TAXABLE   INCOME  IS   CALCULATED.     51 

spelled  out  to  exempt  income  collected  as  trustee, 
and  to  include  only  income  derived  from  the 
business  of  acting  as  trustee;  and  so  the  courts 
may,  it  is  believed,  be  confidently  relied  on  to 
decide.  Certainly,  if  income  received  as  trustee 
is  to  be  included  in  making  the  assessment,  that 
fact  is  persuasive  to  show  that  the  tax  is  laid  but 
colorably  on  the  business,  the  real  intent  being 
to  tax  incomes. 

§  39.  Income  Received  before  Passage  of  Act.  — 
It  would  appear  that  the  Act  intends  to  tax  income 
received  in  the  year  1909  prior  to  its  passage  on 
August  5th  of  that  year; l  but  in  regard  to  a 
similar  point  as  to  the  excise  tax  of  1898  on  gross 
receipts  from  sugar  refining,  it  was  held  that  re- 
ceipts prior  to  the  passage  of  the  Act  were  not  to 
be  included.2  The  question  is,  therefore,  worth 
considering.3  If  the  Act  is  to  be  construed  as  pros- 
pective merely,  the  words  "  the  year/7  which  are 
constantly  recurring  in  the  Act,4  must,  as  applied 
to  the  year  ending  December  31st,  1909,  be  con- 
strued to  mean  so  much  thereof  as  has  elapsed 
since  the  Act  took  effect. 

1  As  to  the  constitutionality  of  this  feature,  see  infra 
§  149.  Compare  also  supra  §  29. 

2Spreckels  Sugar  Ref.  Co.  v.  McClain,  109  Fed.  76,  79 
(reversed  on  other  points,  113  Fed.  244;  192  U.  S.  397). 

Cf.  Merchants'  Ins.  Co.  v.  McCartney,  1  Lowell  447  (under 
Income  Tax  of  1862). 

3  The  Act  provides  that  it  "  shall  take  effect  on  the  day 
following  its  passage."    Act,  §  42  (inf-ra  Appx.  I). 

4  See  infra  §S4A. 


52  FEDERAL  CORPORATION  TAX  LAW. 

§  40.  Income  Derived  from  Property  Exempt 
from  Federal  Taxation.  —  Income  derived  from 
property  which  Congress  has  no  power  to  tax, 
either  directly  or  indirectly,  such  as  state  and 
municipal  bonds,  should  not,  it  is  submitted,  be 
included  in  the  amount  of  the  gross  income  for 
purposes  of  this  tax.  The  statute  does  not  so 
provide,  but  on  the  contrary  apparently  contem- 
plates that  such  income  shall  be  included  in  the 
assessment.  It  is,  however,  submitted  that  in  so 
far  as  the  Act  attempts  to  include  such  income  in 
the  assessment,  it  is  unconstitutional  and  void. 
By  the  unanimous  judgment  of  the  Supreme  Court, 
Congress  has  no  power  to  tax  income  derived  from 
State  and  municipal  securities.1 

It  may  be  claimed,  however,  that  this  tax  is  not 
laid  upon  income  but  upon  the  business,  and  that 
although  Congress  cannot  tax  the  income  derived 
from  state  or  municipal  securities,  yet  it  may  tax 
a  business  as  a  whole  although  the  business  is 
supported  in  whole  or  in  part  by  income  derived 
from  exempt  securities.  Thus,  a  bank  may  be 
taxed  on  the  amount  of  its  deposits  although  the 
money  deposited  is  invested  in  exempt  securities; 2 
and  so  a  tax  may  be  laid  on  shares  of  stock  in 
proportion  to  their  value  ascertained  by  dividing 
the  total  assets  of  the  corporation  by  the  number 
of  its  shares  outstanding,  although  some  of  the 

1  Pollock  v.  Farmers'  L.  &  T.  Co.,  157  U.  S.  429;   15  Sup. 
Ct.  Rep.  673;  158  U.  S.  601;  15  Sup.  Ct.  Rep.  912. 

2  Society  for  Savings  v.  Coite,  6  Wall.  594. 


HOW  THE  TAXABLE  IKCOME  IS  CALCULATED.     53 

property  of  the  company  may  be  invested  ~in 
securities  which  are  constitutionally  exempt  from 
taxation.1  So,  a  state  tax  may  be  laid  on  the 
privilege  of  taking  property  by  will  although  the 
tax  is  proportioned  to  the  value  of  the  property 
so  passing  and  although  the  property  consist  of 
United  States  bonds; 2  but  this  is  because  the 
privilege  of  willing  property,  even  United  States 
bonds,  might  be  wholly  taken  away  by  the  States. 
On  the  same  principle,  a  state  may  levy  a  tax  on 
the  right  to  exist  as  a  corporation  and  may  pro- 
portion the  tax  to  the  amount  of  dividends  de- 
clared by  the  company  although  some  of  the 
income  used  to  pay  the  dividends  comes  from 
interest  on  United  States  bonds; 3  but  this  is 

1  Crown  Cork  &  Seal  Co.  v.  State,  40  Atl.  1074;   87  Md. 
687;  53  L.  R.  A.  417;  St.  Louis  Bldg.  etc.  Ass'n  v.  Lightner, 
47  Mo.  393;   Cleveland  Trust  Co.  v.  Lander,  19  Oh.  Circ.  Ct. 
217;  Charleston  Nat.  Bank  v.  Melton,  171  Fed.  743. 

2  Murdoch  v.  Ward,  178  U.  S.  139;   20  Sup.  Ct.  Rep.  775; 
Plummer  v.  Coler,  178  U.  S.  115;  20  Sup.  Ct.  Rep.  829. 

3  Home  Insurance  Co.  v.  New  York,  134  U.  S.  594;    10 
Sup.   Ct.   Rep.   593.     Cf.   Philadelphia  Contributionship  v. 
Commonwealth,  98  Pa.  48  (upholding  state  statute  levying 
a  tax  on  certain  corporations  measured  by  their  annual 
"  net  earnings  or  income  from  all  sources  "  although  some 
of  the  income  was  derived  from  United  States  bonds,  but  to 
be  compared  with  Philadelphia  etc.  S.  S.  Co.  v.  Pennsylvania, 
122  U.  S.  326;  7  Sup.  Ct.  Rep.  1118,  where  the  same  statute 
was  held  unconstitutional  as  applied  to  corporations  engaged 
in  interstate  commerce,  and  with  New  York,  Lake  Erie  etc. 
Co.  v.  Pennsylvania,  158  U.  S.  431;  15  Sup.  Ct.  Rep.  900, 
where  one  provision  of  the  statute  was  held  valid). 


54  FEDERAL  CORPORATION  TAX  LAW. 

because  the  state  might  altogether  withhold  the 
right  to  exist  as  a  corporation  and  may  therefore 
exact  such  taxes  or  payments  as  it  pleases  in 
exchange  for  conceding  that  right. 

Similar  reasoning  cannot  be  used  to  sustain  the 
present  tax,  because  the  federal  government  has 
no  power  to  take  away  from  companies  existing 
under  state  laws  the  privilege  of  acquiring  income 
from  state  and  municipal  securities.  Hence,  even 
if  we  assume  that  the  present  tax  is  laid,  techni- 
cally, on  the  business,  nevertheless  it  is  certainly 
proportioned  to  the  income  derived  from  all  sources, 
so  that  if  income  from  exempt  securities  is  included, 
the  same  practical  result  is  reached,  so  far  as  this 
point  is  concerned,  as  if  the  tax  were  laid,  nominally 
and  technically  as  well  as  substantially,  upon 
that  income.  .State  and  municipal  securities  are 
exempt  because  of  the  rule  of  constitutional 
policy  which  prevents  the  federal  government 
from  taxing  the  instrumentalities  of  the  states. 
It  is  a  practical  and  not  a  mere  technical  rule. 
It  forbids  a  tax  laid  indirectly,  as  well  as  directly, 
upon  the  exempted  property.  Surely,  therefore, 
the  income  for  purposes  of  this  federal  tax 
must  be  estimated  without  including  income 
derived  from  state  and  municipal  securi- 
ties. 

It  would  seem  to  follow  that  the  earnings  of  a 
corporation  on  a  contract  with  the  state  —  for 
example,  the  profits  of  a  construction  company 
on  a  contract  for  the  erection  of  a  public  build- 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      55 

itig  —  should     be     exempt     from     this     federal 
tax.1 

§  41.  Income  Derived  from  Land.  —  It  is  also 
to  be  doubted  whether,  even  if  the  whole  Act  is 
not  unconstitutional  as  laying  an  unapportioned 
direct  tax,  income  derived  from  real  estate  should 
be  included  in  making  up  the  assessment.2  In 
the  Income  Tax  Cases,3  although  the  court  at  the 
first  hearing  was  equally  divided  upon  the  question 
whether  a  general  tax  on  the  income  of  all  personal 
property  was  a  direct  tax,  yet  six  out  of  the  eight 
judges  who  were  then  sitting  concurred  in  holding 
a  tax  on  the  income  of  land  to  be  a  direct  tax. 
Of  those  six  judges,  one  4  seems  to  have  changed 
his  opinion  on  this  point  on  the  rehearing,  and  the 
minority  was  reinforced  by  the  ninth  judge  who 
had  not  been  present  at  the  first  hearing.  Upon 
the  rehearing,  therefore,  the  court  decided  by  a 
vote  of  five  judges  to  four  that  a  tax  on  income 
derived  from  land  is  a  direct  tax.  If,  then,  the 
present  tax  is  to  be  regarded  as  a  tax  on  income, 
the  income  from  real  estate  must  be  deducted 

1  But  see  Manhattan  Co.  v.  Blake,   148  U.  S.  412;    13 
Sup.  Ct.  Rep.  640  (holding  that  a  federal  tax  may  be  levied 
against  a  bank  proportioned  to  the  average  amount  of  its 
deposits,  although  some  of  the  deposits  represented  money 
deposited  by  the  state  treasurer  to  be  disbursed  by  the  bank 
in  payment  of  debts  of  the  state). 

2  See  infra  §  141-§  144. 

3  Pollock  v.  Farmers'  L.  &  T.  Co.,  157  U.  S.  429;   15  Sup. 
Ct.  Rep.  673;  158  U.  S.  601;  15  Sup.  Ct.  Rep.  912. 

4  Mr.  Justice  Brown. 


56  FEDERAL   CORPORATION  TAX  LAW. 

unless  the  Income  Tax  Cases  are  to  be  over- 
ruled. 

§  42.     Income  from  Invested  Personal  Property. 

—  At  the  rehearing  of  Pollock  v.  Farmers'  Loan 
and  Trust  Co.,1  the  Supreme  Court  decided,  by 
the  same  bare  majority  of  five  judges  to  four, 
that  a  tax  on  the  income  of  invested  personal 
property  is  a  direct  tax.  If  that  decision  stands, 
and  if  the  present  law  is  a  tax  on  income,  it  follows 
that  although  it  expressly  includes  income  derived 
"  from  all  sources/'  including  investments,  yet 
it  is  unconstitutional,  because  not  apportioned 
among  the  states  in  the  ratio  of  population,  so  far 
as  income  from  investments  is  concerned,  If  that 
be  so,  unless  the  Act  is  to  be  held  void  in  toto,  the 
assessment  of  this  tax  should  be  made  solely  with 
reference  to  income  from  business  and  excluding 
all  income  derived  from  investments. 

§  43.  What  is  Income  from  Business  as  Dis- 
tinguished from  Income  from  Investments.  — 
Hence,  it  becomes  necessary  to  inquire  what 
should  be  included  as  income  from  the  business 
as  distinguished  from  income  from  invested 
capital.2 

1 158  U.  S.  601;  15  Sup.  Ct.  Rep.  912;  157  U.  S.  429; 
15  Sup.  Ct.  Rep.  673. 

2  Cf.  Clerical,  etc.  Ass.  Soc.  v.  Carter,  22  Q.  B.  D.  444 
(where  it  was  contended  unsuccessfully  that  interest  arising 
from  investments  by  a  life  insurance  company,  whose  busi- 
ness it  is  to  deal  in  money,  was  to  be  taxed  merely  in  ascer- 
taining the  profits  of  the  business  and  not  as  "  interest  of 
money"  invested);  Reid's  Brewery  Co.  v.  Male  (1891),  2 


HOW   THE  TAXABLE  INCOME  IS  CALCULATED.      57 

This  precise  question  has  been  raised  a  few  times 
in  connection  with  the  War  Revenue  Act  of  1898 
which  expressly  levied  an  excise  tax  on  the  net 
income  derived  from  certain  specified  occupations, 
notably  that  of  refining  sugar.1  The  Supreme 
Court  held  that  rentals  of  a  wharf  which  was 
chiefly  used  by  a  sugar-refining  company  for  the 
unloading  of  vessels  transporting  raw  sugar  to 
its  refinery  should  be  regarded,  not  as  income 
from  invested  real  estate,  but  as  part  of  the  income 
derived  from  the  business.2  On  the  other  hand,  it 
was  held  that  interest  paid  to  the  company  on 
money  in  bank  was  not  part  of  the  income  of  its 
business.3  So  also,  receipts  from  stevedoring  done 
in  unloading  cargoes  of  sugar  consigned  to  the 
company  are  not  to  be  included  when  they  are 
properly  chargeable  to  the  vessels.4  It  was  also 
held  by  a  Circuit  Court  that  dividends  on  stock 

Q.  B.  1  (where  a  distinction  was  taken  by  the  Court  between 
money  lent  in  the  business  and  money  lent  as  an  investment) ; 
Central  Trust  Co.  v.  Treat,  171  Fed.  301  (where  invested 
accumulated  profits  were  held  not  taxable  as  "  capital  and 
surplus  "  of  a  bank,  because  not  used  in  the  banking  busi- 
ness) . 

1  Act,  June  13th,  1898,  c.  448,  §  28  (2  U.  S.  Comp.  Stats. 
p.  2306). 

2Spreckels  Sugar  Ref.  Co.  v.  McClain,  192  U.  S.  397; 
24  Sup.  Ct.  Rep:  376;  113  Fed.  244;  51  C.  C.  A.  201. 

3Spreckels  Sugar  Ref.  Co.  v.  McClain,  192  U.  S.  397; 
24  Sup.  Ct.  Rep.  376. 

4Spreckels  Sugar  Ref.  Co.  v.  McClain,  109  Fed.  76,  79; 
(reversed  on  other  points,  113  Fed.  244;  51  C.  C.  A.  201; 
192  U.  S.  397;  24  Sup.  Ct.  Rep.  376). 


58  FEDERAL   CORPORATION   TAX   LAW. 

of  another  corporation  of  which  the  taxpaying 
company  was  the  sole  shareholder  were  taxable;  1 
but  this  decision  seems  inconsistent  with  the 
opinion  of  the  Supreme  Court  in  the  Spreckels 
Case  and  other  authorities,2  and  moreover  that 
precise  question  cannot  well  arise  under  the  present 
Act,  because  dividends  on  stock  in  other  companies 
subject  to  the  Act  are  exempt. 

A  class  of  cases  which  may  perhaps  throw  some 
light  on  this  question,  relate  to  exemptions  from 
taxation.  When,  for  instance,  a  railway  company 
is  exempted  from  taxation,  it  is  held  that  only  such 
property  is  exempted  as  it  uses  in  connection 
with  its  business,  and  not  property  which  it  holds 
merely  as  an  investment.3  Applying  this  distinc- 
tion, it  has  been  held  that  the  exemption  did  not 
extend  to  the  following  property:  property  acquired 
under  a  statute  amendatory  of  the  charter;4  lands 
held  for  sale  and  not  for  use; 5  portions  of  bank- 
ing house  let  to  tenants;  6  real  estate  in  excess 

1  American  Sugar  Ref.  Co.  v.  Rutan,  123  Fed.  979. 

2  Gramophone  &  Typewriter  v.  Stanley  (1908),  2  K.  B.  89. 
See  also  2  Machen,  Mod.  Law  of  Corps.,  §  1080,  and  supra  §  34. 

3  See  1  Cooley  on  Taxation,  3d  ed.;  375  et  seq.;    12  Am. 
&  Eng.  Enc.  of  Law,  2d  ed.,  359,  362-366,  tit.  "  Exemptions 
from  Taxation." 

4  Ford  v.  Delta  &  Pine  Land  Co.,  164  U.  S.  662;    17  Sup. 
Ct.  Rep.  230;   Southwestern  R.  R.  Co.  v.  Wright,  116  U.  S. 
231;    6  Sup.  Ct.  Rep.  375;   State  v.  B.  &  O.  R.  R.  Co.,  48 
Md.  49,  80. 

5  Tucker  v.  Ferguson,  22  Wall.  527,  574. 

6  Bank  v.  Tennessee,  104  U.  S.  493. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.     59 

of  the  quantity  the  company  could  acquire  by 
condemnation; 1  lands  vacant  or  let  at  a  rental 
to  tenants; 2  timber  lands  acquired  by  railway 
company  in  order  to  convert  the  timber  into  cross- 
ties  and  lumber  for  its  own  use; 3  lands  acquired 
by  railway  company  for  dwellings  for  employees, 
for  car  or  locomotive  factories,  coal  mines,  etc. ; 4 
steamboats  acquired  by  a  railway  company;  5 
grain  elevator  leased  to  private  persons  by  railway 
corporation;  6  and  hotels  constructed  on  the 
land  of  a  railway  company  as  summer  resorts.7 

§  44.  Income  from  Ultra  Vires  Business.  —  A 
corporation  would  be  taxable  in  respect  of  income 

1  Vermont  Central  R.  Co.  v.  Burlington,  28  Vt.  193. 

2  County  of  Ramsey  v.  Chicago  etc.  Ry.  Co.,  33  Minn. 
537;  24  N.  W.  313;  State  v.  Collectors,  25  N.  J.  Law  315. 

3  County  of  Todd  v.  St.  Paul  etc.  Ry.  Co.,  38  Minn.  163; 
36  N.  W.  109. 

4  State   v.   Commissioners   of   Mansfield,    23    N.   J.    Law 
510;    57  Am.  Dec.  409n    (but   holding   that    stations,  car 
and  engine-houses,  tanks  and  repair-shops  are  covered  by 
the  exemption). 

Cf .  Railroad  v.  Berks  County,  6  Pa.  St.  70  (taking  a  similar 
line  of  distinction);  Inhabitants  of  Worcester  v.  Western 
Railroad  Co.,  4  Met.  564  (strip  five  rods  in  width  held  exempt 
though  not  covered  by  tracks  but  used  for  stations,  engine- 
houses,  etc.). 

5  Illinois  Central  R.  R.  Co.  v.  Irwin,  72  111.  452. 

6  Re  Swigert,  119  111.  83;  6  N.  E.  469.     Cf.  State  v.  B.  &  O. 
R.  R.  Co.,  48  Md.  49,  76-77. 

7  State  v.  B.  &  O.  R.  R.  Co.,  48  Md.  49,   77-78  (secus  as  to 
hotels  constructed  mainly  for  the  accommodation  of  pas- 


60  FEDERAL   CORPORATION   TAX  LAW. 

derived  from  an  ultra  vires  business  to  the  same 
extent  as  if  it  were  intra  vires.1 

§  44A.  Income  from  Foreign  Business  and 
Property.  —  It  is  quite  clear  that  in  the  case  of 
domestic  companies  the  Act  intends  to  include 
within  the  tax  income  from  foreign  property  and 
business  to  the  same  extent  as  income  from  business 
carried  on  and  property  existing  within  the  United 
States.  This  is  the  necessary  force  of  the  unquali- 
fied expressions  used  —  particularly,  of  the  ex- 
pression "  from  all  sources.77  2  To  this  effect, 
also,  are  the  regulations  of  the  Commissioner  of 
Internal  Revenue.3  It  seems,  therefore,  that 
even  income  from  foreign  real  estate  is  included  — 
a  curious  result,  in  view  of  the  principle  of  the 
Income  Tax  Cases  that  a  tax  on  income  is  equiva- 
lent to  a  tax  on  the  property  from  which  it  is 
derived. 

§  45.  Deductions  to  be  Made  from  Gross  Income 
—  Is  Statutory  List  of  Deductions  Exhaustive?  — 
After  the  gross  income  has  been  determined,  the 
next  step  is  to  ascertain  the  deductions  which  are 
to  be  made  therefrom  in  order  to  arrive  at  the  net 
income.  The  Act  expressly  enacts  that  certain 

xSalt  Lake  City '  v.  Hollister,  118  U.  S.  256;  6  Sup.  Ct. 
Rep.  1055;  People  ex  rel.  Devoe  Co.  v.  Roberts,  51  N.  Y. 
App.  Div.  77;  64  N.  Y.  Supp.  494.  But  see  People  ex  rel. 
Wall  etc.  Co.  v.  Miller,  181  N.  Y.  328,  334. 

2  Act,  Par.  1,  line  19;  Par.  2,  line  5;  Par.  3,  line  44   (infra 
Appx.   I). 

3  Int.  Rev.  Regs.  No.  31,  Dec.  3d,  1909,  Art.  I    (infra 
Appx.  II). 


HOW   THE   TAXABLE   INCOME  IS   CALCULATED.      61 

classes  of  deductions  shall  be  made,  some  of 
which  deductions  would  not  be  proper  in  esti- 
mating net  income  if  they  had  not  been  expressly 
allowed  by  law.  *  It  does  not  say  in  so  many  words 
that  no  other  deductions  are  to  be  permitted.2 
Accordingly,  it  is  submitted  that  if  there  are  any 
additional  kinds  of  deductions  which  ought  to  be 
made  from  gross  income  in  order  to  ascertain  the 
net  income,  then  the  statutory  list  of  required 
deductions  ought  not  to  be  taken  as  exhaustive, 
so  as  to  forbid  by  implication  any  such  additional 
deductions. 

It  is  true  that  Paragraph  3  provides  that  "  there 
shall  be  deducted  from  the  amount  of  the  net 
income  of  each  of  such  corporations,  etc.,  ascer- 
tained as  provided  in  the  foregoing  paragraphs  of 
this  section  the  sum  of  five  thousand  dollars,  and 
said  tax  shall  be  computed  upon  the  remainder  of 
said  net  income."  3  If  any  other  deductions  are 
made  in  addition  to  those  enumerated  in  Paragraph 
2,  it  may  be  contended  that  the  net  income  is 
not  "  ascertained  as  provided  "  in  that  paragraph, 
although  Paragraph  3  provides  in  language  just 
quoted  that  the  tax  shall  be  computed  upon  net 
income  "  ascertained  as  provided  in  the  foregoing 

1  See,  for  example,  infra  §  53. 

2  It  differs  in  this  respect  from  the  British  Income-Tax 
Act  which  expressly  provides  that  net  income  shall  be  es- 
timated "  without  other  deduction  than  is  hereinafter  al- 
lowed ":  Russell  v.  Town  and  County  Bank,  13  A.  C.  418. 

3  Act,  Par.  3,  lines  1-8  (infra  Appx.  I). 


62  FEDERAL   CORPORATION   TAX  LAW. 

paragraphs/7  This  contention,  however,  begs  the 
question;  for  if  Paragraph  2  does  not  forbid  any 
additional  deductions  that  may  be  proper  accord- 
ing to  general  principles  of  law,  and  that  are 
impliedly  allowed  by  the  provision  of  Paragraph 
1  that  the  tax  shall  be  proportioned  to  "  net 
in co me/ ' i  then  the  net  income  is  ascertained  as  pro- 
vided in  Paragraphs  1  and  2  although  such  deduc- 
tions be  made.  Paragraph  3  does  not  declare  that 
the  tax  shall  be  computed  upon  the  net  income  ascer- 
tained by  making  from  the  gross  income  the  deduc- 
tions enumerated  in  Paragraph  2  and  no  others. 

The  general  question  what  expenses  should  be 
charged  to  capital  and  what  to  income  has  received 
consideration  in  the  law  of  corporations  in  con- 
nection with  dividends 2  and  with  income  bonds.3 

§  46.  Deductions  Expressly  Required  —  Main- 
tenance and  Operation  —  The  Provision  in  General. 
—  We  proceed,  therefore,  to  the  examination  of 
the  deductions  which  are  expressly  allowed.  The 
first  of  these  is,4 

"  All  the  ordinary  and  necessary  expenses  actually 
paid  out  of  income  in  the  maintenance  and  operation 
of  its  business  and  properties,  including  all  charges 
such  as  rentals  or  franchise  payments  required  to 
be  made  as  a  condition  to  the  continued  use  or 
possession  of  property." 

1  Act,  Par.  1,  lines  17-18  (infra  Appx.  I). 

2  See  2  Machen,  Mod.  Law  of  Corps.,  §  1330-§1337. 

3  See  2  Machen,  Mod.  Law  of  Corps.,  §  2107. 

4  Act,  Par.  2,  lines  6-12  (infra  Appx.  I). 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.     63 

This  class  of  deductions  would  have  been  proper 
even  if  there  had  been  no  express  requirement  to 
that  effect.  In  order  to  ascertain  net  income,  it  is 
clearly  necessary  to  deduct  the  expenses  of  main- 
tenance and  operation. l  It  is,  however,  necessary 
to  examine  this  clause  of  the  Act  somewhat 
minutely  in  order  to  see  exactly  what  is  directed 
to  be  deducted. 

§  47.  What  is  "  Maintenance  and  Operation  "  — 
In  General.  —  The  statute  gives  no  definition  of 
"  maintenance  and  operation."  This  must  be 
determined  by  dictionaries  and  general  principles 
of  law.2  Observe  that  the  Act  does  not  confine 
the  deduction  to  the  expense  of  maintaining  and 
operating  the  business  and  property  during  the 

1  Cf.  2  Machen,  Mod.  Law  of  Corps.,  §  1331,  §  1332. 

2  Compare  the  authorities  as  to  what  claims  are  entitled 
to  priority  as  "  operating  expenses  "  in  a  receivership  of 
a  railway  or  other  company.    2  Machen,  Mod.  Law  of  Corps., 
§  1941-§  1943,  §  2048.    See  also  Llewellyn's  Appeal,  103  Pa. 
458.    For  a  liberal  construction  of  the  word  "  maintenance," 
see  Smith  v.  Grayson  County  (Texas),  44  S.  W.  921,  923. 
Cf.  Hesketh  v.  Bray,  21  Q.  B.  D.  444  (expense  of  construct- 
ing a  sea-wall  for  reclamation  of  a  salt-marsh  held  not  proper 
to  be  deducted  from  income  under  a  statute  allowing  deduc- 
tion of  the  expense  of  constructing  sea-walls  "  necessary  for 
the  preservation  or  protection  of  such  lands  against  the 
encroachment  or  overflowing  of  the  sea  or  any  tidal  river  "); 
Central  R.  R.  Co.  v.  Collins,  40  Ga.  582  (as  to  construction 
of  a   charter  power   of   "  maintaining   and   sustaining "    a 
railway).    As  to  deduction  of  sums  necessary  to  be  expended 
in  collecting  debts,  etc.,  see  Stevens  v.  Bishop,  20  Q.  B.  D. 
442   (distinguished  in  Duke  of   Norfolk  v.   Lamarque,   24 
Q.  B.  D.  485). 


64  FEDERAL   CORPORATION   TAX  LAW. 

year,  but  that  a  payment  made  during  the  year 
for  maintaining  or  operating  the  company  during 
some  previous  year  is  also  to  be  deducted. l  Where 
a  payment  is  made  for  a  new  improvement  replac- 
ing an  old  structure,  so  much  of  the  expenditure 
as  would  be  necessary  as  repairs  to  keep  the  old 
structure  up  to  its  normal  condition  is  properly 
chargeable  to  maintenance.2  It  may  be  ques- 
tioned whether  damages  paid  for  torts  committed 
in  the  course  of  the  business  are  to  be  treated  as 
expense  of  maintenance  or  are  more  properly 
classified  as  a  "  loss."  3  A  gross  payment  to  an 
officer  in  commutation  of  his  salary  is  a  capital 
charge  where  the  payment  is  made  in  pursuance 
of  a  stipulation  in  a  contract  whereby  the  company 
bought  the  business  of  a  former  concern  and 
agreed  as  part  of  the  consideration  to  pay  a  salary 
to  this  officer  during  life.4  It  has  been  held  in 
England  that  money  paid  to  an  association  of 
employers  which  indemnified  subscribers  against 
strikes  was  not  to  be  deducted  from  gross  income 
under  the  British  Income  Tax  Acts  as  "  money 
wholly  and  exclusively  laid  out  for  the  purposes  of 
the  trade; "  5  but  nevertheless  it  is  submitted 
that  a  fair  construction  of  the  words  "  maintenance 

1Cf.  infra    §96. 

2  Grant  v.  Hartford  etc.  R.  R.  Co.,  93  U.  S.  225,  228. 

3  Cf.  Strong  &  Co.  v.  Woodifield  (1906),  A.  C.  448. 

4  Royal  Ins.  Co.   tf.  Watson   (1897),  A.  C.   1,  affirming 
Watson  v.  Royal  Ins.  Co.  (1896),  1  Q.  B.  41,  on  somewhat 
different  grounds. 

5  Rhymney  Iron  Co.  v.  Fowler  (1896),  2  Q.  B.  79. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      65 

and  operation  "  in  the  present  law  would  entitle 
the  company  to  deduct  any  such  payments  in  the 
nature  of  premiums  for  insurance.  Other  English 
cases  take  a  similar  narrow  view  of  the  expenses 
which  may  be  allowed  as  trade  expenses.1 

§  48.  Maintenance  of  Property.  —  The  deduc- 
tion required  is  of  the  expense  of  maintenance,  and 
operation  of  the  "  business  and  properties."  In 
the  parallel  clause  with  respect  to  foreign  com- 
panies, the  language  is  "  business  and  property  " 
in  the  singular  number.2  It  would  seem  that  no 
significance  attaches  to  this  slight  variation. 
The  insertion  of  the  word  "  property  "  or  "  prop- 
erties "  is  significant,  however;  for  while  the  Act 
professes  to  lay  a  tax  on  business  so  as  to  obviate 
constitutional  objections,  yet  in  almost  every 

1  See  Southwell  v.  Savill  Bros.  (1901),  2  K.  B.  349  (money 
spent  by  brewery  in  procuring  licenses  for  houses  in  which 
it  might  be  interested  held  not  a  mere  operating  expense); 
Brickwood  &  Co.  v.  Reynolds  (1898)  1  Q.  B.  95  (repairs  to 
premises  rented  by  a  brewery  to  retail  dealers  contracting 
to  buy  from  no  other  brewers  held    not    deductible  from 
gross  income  of  brewery) . 

But  see  Russell  v.  Town  and  County  Bank,  13  A.  C.  418 
(tending  towards  a  more  liberal  view,  and  allowing  a  banking 
company  to  deduct  the  full  rental  value  of  its  business 
premises  including  the  part  thereof  occupied  by  their  manager 
as  a  dwelling  house);  Smith  v.  Lion  Brewery  Co.  (1909), 
2  K.  B.  912  (cost  of  liquor  licenses  of  retailers  renting 
premises  from  brewery  and  covenanting  to  sell  only  that 
company's  beer  may,  when  deducted  from  the  rent,  be 
treated  as  a  trade  expense  of  the  brewery). 

2  See  infra  §  80. 


66  FEDERAL   CORPORATION  TAX  LAW. 

paragraph  a  distinction  is  drawn  between  the 
business  and  the  property  of  the  company.  The 
income  from  both  is  to  be  included  in  the  assess- 
ment; and  the  expenses  of  maintaining  both  are 
to  be  deducted. 

§  49.  Expenses  "  Actually  Paid  "  —  Meaning  of 
the  Expression.  —  It  is  only  expenses  "  actually 
paid "  *  which  are  required  to  be  deducted:  a 
liability  which  has  been  incurred  but  not  dis- 
charged is  not  to  be  included.  This  is  no  serious 
hardship  because  the  deduction  could  in  that  case 
be  made  the  next,  or  any  subsequent,  year;  for 
as  already  stated  the  deduction  is  not  confined 
to  the  expense  incurred  for  maintenance  and 
operation  during  the  year  for  which  the  tax  is 
levied.2  The  force  of  the  words  "  actually  paid  " 
should  not  be  pressed  too  far.3  It  is  not  as  if  the 
Act  had  said  "  actually  paid  in  cash/'  although 
even  in  that  case  a  set-off  by  mutual  agreement  of 
an  existing  debt  owing  to  the  company  would  be 

1  Act,  Par.  2,  line  7  (infra  Appx.  I). 

2  Supra  §  47. 

3  The  Regulations  of  the  Treasury  Department  give  them 
a  very  liberal  interpretation  in  favor  of  the  corporations, 
and  indeed  practically  deprive  them  of  all  meaning.     U.  S. 
Int.  Rev.  Regs.  No.  31,  Dec.  3d,  1909,  Art.  4  (infra  Appx.  II). 
Cf.  U.  S.  v.  Louisville  &  N.  R.  Co.,  33  Fed.  829  (holding  that 
a  consolidation  of  two  railway  companies  amounts  to  a  pay- 
ment of  interest  due  by  one  to  the  other  within  the  meaning 
of  an  Act  of  Congress  taxing  interest  paid,  but  is  presumably 
not  paid  from  the  "  earnings  "  of  the  debtor  within  the  mean- 
ing of  that  statute). 


HOW   THE  TAXABLE   INCOME   IS   CALCULATED.     67 

equivalent  to  payment.1  As  it  is,  it  would  seem 
that  according  to  the  fair  meaning  of  the  words 
used,  they  are  equivalent  to  actually  discharged 
or  satisfied.  However,  it  has  been  held  in  England 
that  where  an  insurance  company  advances  a  part 
of  the  premiums  to  the  insurer  as  a  loan  on 
the  security  of  the  policy,  giving  him  a  receipt 
for  the  full  premium,  the  amount  so  advanced  can- 
not be  treated  by  the  insurer  as  "  paid  by  him  " 
within  the  meaning  of  the  British  income-tax 
laws,  and  therefore  deductible  from  his  gross  in- 
come.2 

§  50.  Necessity  that  Expenses  Should  Have 
Been  Paid  "  out  of  Income  "  in  Order  to  be  De- 
ducted. —  In  order  to  come  within  the  clause 
now  under  consideration  the  expenses  must  not 
merely  be  paid  but  must  be  paid  "  out  of  income."  3 
In  the  corresponding  clause  as  to  foreign  companies, 
the  words  are  "  out  of  earnings";41  and  in  the 
Third  Paragraph  of  the  Act  domestic  as  well  as 
foreign  companies  are  required  to  make  a  return 
to  the  collector  of  the  amounts  expended  for 
maintenance  and  operation  "  out  of  earnings," 
instead  of  income. 5  It  would  seem,  therefore,  that 

1  Cf.  1  Machen,  Mod.  Law  of  Corps.,  §  794,  §  797,  as  to 
the  construction  which  has  been  given  to  statutes  requiring 
"  payment  in  cash  "  for  shares. 

2  Hunter  v.  Rex  (1904),  A.  C.  161. 

3  Act,  Par.  2,  line  7  (infra  Appx.  I). 

4  Act,  Par.  2,  lines  51-52  (infra  Appx.  I). 

5  Act,  Par.  3,  line  58  (infra  Appx.  I). 


68  FEDERAL  ooittoHATiott  TAX  LAW. 

Congress  used  the  words  "  earnings  "  and  "  in- 
come "  in  this  connection  as  synonymous  and 
interchangeable.  Nevertheless,  they  are  not  prop- 
erly identical  in  meaning;  for  "  income  "  includes 
receipts  from  invested  capital  whereas  "  earn- 
ings "  should  be  confined  to  profits  from  the 
transaction  of  business.  However,  Congress  must 
have  intended  in  this  place  to  use  earnings  in  the 
broader  sense  more  properly  attached  to  the  other 
word. 

By  the  general  principles  of  -  law,  if  a  revenue 
charge  is  paid  out  of  capital,  it  may  properly, 
and  perhaps  must,  be  carried  over  to  the  revenue 
account  and  deducted  from  the  balance  of  profit 
shown  thereby  before  any  part  thereof  can  be 
treated  as  profit  applicable  to  dividends.1  Do  the 
words  "  out  of  income  "  prohibit  a  similar  action 
in  calculating  net  income  for  the  purpose  of  the 
tax?  So  to  hold  would  be  a  narrow,  technical 
and  unjust  construction;  for  it  is  difficult  to  see 
what  reason  could  actuate  the  legislature  in  pro- 
hibiting recoupment  out  of  gross  income  for  main- 
tenance expenses  which  have  been  borne  in  the 
first  instance  by  capital.  And  yet  unless  that 
construction  is  given  to  the  words  "  out  of  income/' 
they  seem  to  have  no  meaning  whatsoever. 

Even  if  the  words  referred  to  should  be  held  to 
prohibit  the  inclusion  under  this  head  of  main- 
tenance charges  borne  by  capital,  the  amount  of 
capital  so  consumed  might  be  treated  as  a  "  loss  " 

1  2  Machen,  Mod.  Law  of  Corps.,  §  1331,  §  1328. 


HOW   THE  TAXABLE   INCOME   IS   CALCULATED.      69 

and  included  under  the  second  class  of  deductions 
prescribed  in  the  Act. 1 

§  51.  Meaning  of  "  Ordinary  and  Necessary  " 
Expenses.  —  The  language  of  the  Act  is  that 
"  the  ordinary  and  necessary  expenses  "  of  main- 
tenance and  operation  shall  be  deducted.  Must 
an  expense  be  both  ordinary  and  necessary  in 
order  to  fall  within  this  clause?  It  would  seem 
not.  The  intent  was  to  include  both  all  the  ordi- 
nary expenses,  and  also  all  extraordinary  but 
necessary  expenses.  The  meaning  would  perhaps 
have  been  a  little  clearer  if  the  word  "  the  "  had 
been  repeated  before  the  word  "  necessary/'  It 
would  seem  that  under  the  head  of  extraordinary 
necessary  expenses  might  come  expenditures  made 
during  the  year  1909  or  some  succeeding  year  for 
the  purpose  of  making  good  a  depreciation  of 
fixed  capital  which  occurred  prior  to  1909  and 
which  therefore  could  not  be  credited  as  a  deduc- 
tion under  Class  2  of  the  prescribed  deductions.2 

§  52.  Charges  such  as  Rentals  or  Franchise 
Payments.  —  The  Act  expressly  provides  that 
"  all  charges  such  as  rentals  or  franchise  payments 
required  to  be  made  as  a  condition  to  the  continued 
use  or  possession  of  property  "  shall  be  included 
as  operating  expenses.  This  would  seem  to  be 
mere  surplusage; 3  for  such  expenditures  would 

1  As  to  which  see  infra  §  53- §  59. 

2  U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  3d,  1909,  Art.  4 
(Infra  Appx.  II). 

3  As  to  the  case  where  in  addition  to  an  annual  rental 


70  FEDERAL   CORPORATION   TAX   LAW. 

seem   to   be   a   typical   example   of   expenses   for 
operation  and  maintenance.1 

§  53.  Deductions  for  Losses  —  Necessity  for  an 
Express  Provision  of  Law  Allowing  such  Deduc- 
tions. —  The  second  class  of  deductions  required 
to  be  made  2  embrace: 

"All  losses  actually  sustained  within  the  year 
and  not  compensated  by  insurance  or  otherwise, 
including  a  reasonable  allowance  for  depreciation  of 
property,  if  any,  and  in  the  case  of  insurance  the 
sums  other  than  dividends,  paid  within  the  year 
on  policy  and  annuity  contracts  and  the  net  addition, 
if  any,  required  by  law  to  be  made  within  the  year 
to  reserve  funds." 

This  is  a  very  important  class  of  the  prescribed 
deductions;  for  it  is  possible  that  if  deductions  of 
this  class  had  not  been  specifically  directed  some 
of  them  at  least  would  have  been  held  not  proper 
to  be  allowed  in  calculating  net  income.3  For 

a  large  premium  or  bonus  is  paid  for  a  lease,  see  Gillatt  v. 
Colquhoun,  33  W.  R.  258. 

1  As  to  a  suggested  case  which  might  fall  under  this  head, 
see  infra  §  70. 

2  Act,  Par.  2,  lines  12-21  (infra  Appx.  I). 

3  Philadelphia    Contributionship    v.    Commonwealth,    98 
Pa.  48  (loss  of  capital  by  payment  of  bonds  purchased  at  a 
premium  not  proper  to  be  deducted  in  estimating  taxable 
annual  income). 

But  see  Little  Miami  etc.  R.  R.  Co.  v.  United  States,  108 
U.  S.  277,  280;  2  Sup.  Ct.  Rep.  627  (holding  that  without 
express  authorisation  losses  by  depreciation  of  investments 
should  be  deducted  in  calculating  taxable  income);  United 
States  v.  Central  Nat.  Bank,  10  Fed.  612  (holding  that  losses 
by  embezzlement  during  the  period  covered  by  the  tax 


HOW   THE   TAXABLE    INCOME   IS   CALCULATED.      71 

example,  depreciation  of  fixed  property  may  be 
disregarded  in  calculating  profits  for  the  purpose  of 
dividends; 1  and  it  is  quite  possible  that  the  courts 
might  have  held  that  it  should  be  disregarded  in 
calculating  net  profits  for  the  purpose  of  this  tax, 
if  the  law  had  not  expressly  declared  the  contrary.2 
Of  course,  even  without  any  express  statutory 
authority  it  would  have  been  necessary  in  order 
to  ascertain  the  net  income  to  deduct  all  losses 
of  circulating  capital  incurred  within  the  year.3 

§  54.  Meaning  of  "  Losses."  —  The  Act  gives 
no  general  definition  of  "  losses,"  but  leaves  the 
meaning  to  be  ascertained  by  general  principles  of 
law.  The  thing  itself  is  common  enough,  and 
perhaps  the  meaning  of  the  word  is  correspondingly 
well  understood.  Loss  by  embezzlement  would  be 
included.4  So,  loss  by  insolvency  of  debtors.5 

§  55.  Loss  must  be  "  Actually  Sustained  within 
the  Year."  —  In  order  to  be  within  this  provision 
the  loss  must  be  "  actually  sustained  within  the 

should  be  deducted,  but  to  be  compared  with  S.  C.  on  error 
to  review  judgment  on  an  amended  complaint,  137  U.S.  255). 

1  2  Machen,  Mod.  Law  of  Corps.,  §  1325-§  1328. 

2  Alianza  Co.  v.  Bell  (1906),  A.  C.  18;  Coltness  Iron  Co.  v. 
Black,  6  A.  C.  315;  Forder  v.  Handyside,  1  Ex.  D.  233. 

But  see  Little  Miami  etc.  R.  R.  Co.  v.  United  States,  108 
U.  S.  277;  2  Sup.  Ct.  Rep.  627  (stated  supra).  See  also 
infra  §  57. 

3  Lawless  v.  Sullivan,  6  A.  C.  373. 

4  United  States  v.  Central  Nat.  Bank,  10  Fed.  612  (to  be 
compared  with  S.  C.  at  a  subsequent  stage,  137  U.  S.  255). 

5  United  States  v.  Mayer,  Deady  127. 


72  FEDERAL  CORPORATION  TAX  LAW. 

year  "  *  —  that  is  within  the  calendar  year  2  for 
which  the  tax  is  assessed.  It  may  not  always  be 
easy  to  determine  the  precise  moment  of  time 
when  a  loss  is  "  sustained  ";  but  in  general  little 
difficulty  will  be  encountered. 

§  56.  Must  be  "  Not  Compensated  by  Insurance 
or  Otherwise."  —  To  be  within  the  statute,  the 
loss  must  be  "  not  compensated  by  insurance  or 
otherwise"  3  Suppose  a  loss  is  covered  by  insur- 
ance in  a  company  which  denies  its  liability,  or 
suppose  the  insurance  has  not  been  collected:  is 
the  loss  in  such  cases  "  compensated  by  insurance  " 
within  the  meaning  of  the  Act?  Perhaps  in  such 
cases,  the  loss  should  be  taken  to  be  "  compen- 
sated by  insurance  ";  and  if  it  should  subsequently 
prove  impossible  to  collect  the  loss,  either  by  a 
judgment  in  favor  of  the  insurance  company  in 
a  suit  on  the  policy,  or  because  of  the  supervening 
insolvency  of  the  insurance  company,  then  the 
amount  of  the  original  loss  covered  by  the  policy 
might  be  treated  as  a  loss  occurring  in  the  year  in 
which  the  impossibility  of  collecting  the  insurance 
became  established. 

The  meaning  of  the  words  "  or  otherwise  "  is 
very  obscure.  They  certainly  must  be  confined  to 
cases  in  which  the  loss  is  compensated  either  by 
insurance  or  something  ejusdem  generis  —  e.  g. 
by  a  guarantor.  Certainly  those  words  could  have 

1  Act,  Par.  2,  line  13  (infra  Appx.  I). 

2  See  infra  §  84A. 

3  Act,  Par.  2,  lines  13-14  (infra  Appx.  I). 


HOW  THE  TAXABLE   INCOME   IS   CALCULATED.     73 

no  application  where  the  loss  is  made  good  by 
voluntary  contributions  by  the  shareholders,  or 
by  assessments  upon  them;  or  where  the  loss  is 
counterbalanced  by  profits. 

§  57.  Depreciation  of  Property.  —  The  im- 
portance of  the  provision  as  to  depreciation  of 
property  l  has  been  already  adverted  to.2  It 
evidently  covers  depreciation  of  all  kinds  —  by 
wear  and  tear,  by  the  diminution  in  value  of  wast- 
ing assets,  such  as  mines,  leases  or  patents,  or  in 
consequence  of  supersession  by  improved  ap- 
paratus, and  in  fact  diminution  in  value  of  all 
kinds.  But  for  this  express  provision,  it  might 
have  been  plausibly  argued,  and  perhaps  would 
have  been  held,  that  a  depreciation  in  the  value  of 
a  company's  fixed  capital  does  not  in  any  way 
diminish  the  net  income.3  It  is  only  depreciation 
occurring  within  the  year  that  is  required  to  be 
deducted;  this  is  the  only  reasonable  meaning  of 
the  statute,  and  is  expressly  declared  by  the 
Commissioner  of  Internal  Revenue  in  his  published 
regulations.4  However,  all  depreciation  within  the 
year  must  be  allowed  notwithstanding  the  fact 
that  in  previous  years  allowances  for  depreciation 

1  Act,  Par.  2,  lines  14-16  (infra  Appx.  I). 

2  Supra  §53. 

3  This  is  true  under  the  English  Income  Tax  Laws:  Gillatt 
v.  Colquhoun,  33  W.  R.  258;    Coltness  Iron  Co.  v.  Black, 
6  A.  C.  315;  Alianza  Co.  v.  Bell  (1906),  A.  C.  18;  Forder  v. 
Handyside,  1  Ex.  D.  233.    Supra  §  53. 

4U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  3d,  1909,  Art.  4 
(infra  Appx.  II). 


74  FEDERAL   CORPORATION   TAX   LAW. 

or  wear  and  tear  aggregating  the  full  value  of  the 
property  may  have  been  made  to  the  company.1 

§  58.  Deductions  by  Insurance  Companies  - 
"  Sums  other  than  Dividends  Paid  within  the  Year 
on  Policy  and  Annuity  Contracts."  —  The  Act 
prescribes  two  peculiar  deductions  in  the  case  of 
insurance  companies.2  The  first  of  these  is  "  the 
sums  other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts. "  3  This  may 
mean  that  insurance  companies  shall  be  allowed 
to  deduct  all  losses  paid  by  them  within  the  year. 
As  such  losses  constitute  debts  of  the  companies, 
they  would  fall  under  the  general  head  of  deduc- 
tions for  indebtedness,  which  will  be  considered 
under  the  next  heading.  It  may,  however,  be 
said  here  that  the  net  income  of  an  insurance 
company  certainly  could  not  be  ascertained  without 
deducting  losses  paid  by  the  corporation;  and 
accordingly  the  same  deductions  would  have  been 
necessary  if  the  Act  had  merely  laid  a  tax  in  pro- 
portion to  the  company's  net  income  without 
fixing  any  regulations  for  its  ascertainment.4 

Any  other  rule  would  be  grossly  unjust.  As 
this  express  provision  applies  only  to  insurance 
companies,  and  as  many  similar  cases  in  respect 

1  John  Hall,  Junior,  &  Co.  v.  Rickman  (1906),  1  K.  B.  311. 

2  Act,  Par.  2,  lines  16-21  (infra  Appx.  I).    As  to  what  is 
an  insurance  company  within  the  meaning  of  the  Act,  see 
supra  §  20. 

3  Act,  Par.  2,  lines  17-19  (infra  Appx.  I). 

4  Cf.  Gresham  Life  Ass.  Soc.  v.  Styles  (1892),  A.  C.  309. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      75 

to  other  companies  may  arise,  one  can  readily 
understand  the  injustice  which  might  result  from 
holding  the  statutory  list  of  deductions  to  be 
exclusive.  Perhaps,  however,  even  if  the  statutory 
list  should  be  held  to  be  exclusive,  payments 
similar  to  payments  of  losses  by  insurance  com- 
panies might  be  regarded  as  operating  expenses, 
and  deductible  as  such. 

In  England,  it  is  held  that  an  insurance  company 
in  calculating  its  taxable  income  cannot  make 
any  allowance  for  unearned  premiums  paid  for 
risks  outstanding  at  the  close  of  the  year,  but  that 
the  income  should  be  ascertained  by  deducting 
the  total  expenditures  during  the  year  from  the 
total  receipts  during  that  period,  leaving  outstand- 
ing risks  to  be  deducted,  in  case  of  loss,  as  an 
expense  during  the  next  year. l 

§  59.  Insurance  Companies  (Continued)  —  Ad- 
ditions to  Reserve  Funds.  —  The  second  kind  of 
peculiar  deductions  prescribed  in  the  case  of  insur- 
ance companies  is  "  the  net  addition,  if  any, 
required  by  law  to  be  made  within  the  year  to 
reserve  funds/'  2  This  would  hardly  be  proper 
as  an  item  to  be  deducted  in  ascertaining  net 
income  if  the  statute  had  not  expressly  so  provided; 
for  an  addition  to  a  reserve  fund  is  simply  an 

Imperial  Fire  Ins.  Co.  v.  Wilson,  35  L.  T.  N.  S.  271; 
General  Accident  etc.  Corp.  v.  McGowan  (1908),  A.  C.  207 
(where,  however,  the  Lord  Chancellor  admitted  that  method 
approved  by  the  court  was  "  not  scientifically  unassailable  "). 

2  Act,  Par.  2,  lines  19-21  (infra  Appx.  I). 


76  FEDERAL   CORPORATION   TAX   LAW. 

accretion  to  the  company's  capital  moneys. 
Consequently,  in  order  that  such  a  deduction  should 
be  allowed  it  must  be  brought  strictly  within  the 
statute.  And  in  order  to  be  within  the  Act,  the 
addition  to  the  reserve  must  be,  in  the  first  place, 
"  required."  A  voluntary  addition  is  not  to  be 
deducted,  except,  indeed,  that  the  last  clause  of 
the  Second  Paragraph  of  the  Act  provides  that 
"  in  assessment  insurance  companies  the  actual 
deposit  of  sums  with  State  or  Territorial  officers, 
pursuant  to  law,  as  additions  to  guaranty  or 
reserve  funds  shall  be  treated  as  being  payments 
required  by  law  to  reserve  funds."  Secondly,  it 
must  be  "  required  by  law"  If  the  company  is 
incorporated  by  special  act,  it  would  be  sufficient 
if  the  addition  to  the  reserve  were  required  by  that 
act,  which  of  course  is  a  law.  But  a  requirement 
in  the  company's  by-laws,  or  in  the  incorporation 
paper  of  a  company  incorporated  under  general 
laws,  would  not  come  within  the  Act  of  Congress. 
Thirdly,  the  addition  to  the  reserve  must  be 
"  required  by  law  to  be  made  within  the  year."  1 
It  is  not  enough  that  it  is  actually  made  within 
the  year;  and  conversely,  perhaps,  the  deduction 
may  be  allowed  even  though  the  addition  to  the 
reserve  is  not  made  within  the  year  if  it  is  required 
so  to  be. 

§  60.     Indebtedness  —  The  Provision  in  General. 
—  The   next   deduction  relates  to  indebtedness.2 

1  Act,  Par.  2,  lines  20-21  (infra  Appx.  I). 

2  Act,  Par.  2,  lines  21-30  (infra  Appx.  I). 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      77 

The  provision  is   that   there  shall  be   deducted: 

"  Interest  actually  paid  within  the  year  on  its 
bonded  or  other  indebtedness  to  an  amount  of 
such  bonded  and  other  indebtedness  not  exceeding 
the  paid-up  capital  stock  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  company, 
outstanding  at  the  close  of  the  year,  and  in  the 
case  of  a  bank,  banking  association  or  trust  com- 
pany, all  interest  actually  paid  by  it  within  the 
year  on  deposits." 

It  may  be  urged  that  in  accordance  with  the 
ejusdem  generis  rule  of  construction  the  words 
"  or  other "  in  the  phrase  "  bonded  or  other 
indebtedness "  should  be  construed  as  referring 
only  to  indebtedness  of  the  same  general  character 
as  bonded  indebtedness  l  —  in  other  words  funded 
as  distinguished  from  floating  indebtedness.  Prob- 
ably this  construction  should  be  adopted;  for 
floating  indebtedness  should  ordinarily  be  paid 
outright,  principal  and  interest,  out  of  income,2 
so  that  payments  made  for  that  purpose  may  be 
regarded  as  necessary  operating  expenses  and  as 
such  deductible  from  the  gross  income  under  the 
first  class  of  deductions  specified  in  this  law. 
Moreover,  the  phrase  we  are  now  considering 
apparently  contemplates  not  an  indebtedness  of 
fluctuating  amount,  but  an  indebtedness  whose 
amount  can  be  ascertained  with  accuracy  and  can 

1  As  to  the  meaning  of  "  bonded  indebtedness,"  see  2 
Machen,  Mod.  Law  of  Corps.,  §  1679. 

2  2  Machen,  Mod.  Law  of  Corps.,  §  1333,  §  2107. 


78  FEDERAL   CORPORATION   TAX   LAW. 

be    compared   in    respect    to    stability    with    the 
amount  of  the  capital  stock. 

It  is  only  interest  "  actually  paid  within  the 
year "  *  that  is  directed  to  be  deducted.  The 
meaning  of  those  words  has  been  already  'discussed 
in  another  connection.2 

§  61.  Limitation  on  Amount  of  Indebtedness  - 
What  is  the  Paid-up  Capital  Stock.  —  The  statute 
directs  that  there  shall  be  deducted  all  interest 
actually  paid  within  the  year  on  an  amount  of 
indebtedness  "  not  exceeding  the  paid-up  capital 
stock  .  .  .  outstanding  at  the  close  of  the  year."  3 
Now,  the  words  "  capital  stock  "  are  usually  am- 
biguous, and-  may  refer  either  to  the  company's 
nominal  capital  or  to  its  actual  capital  or  assets,4 
and  in  a  tax  law  they  are  usually  construed  to 
apply  to  the  company's  actual  assets  rather  than 
its  nominal  capital.5  Nevertheless,  in  this  case, 
it  would  seem  to  refer  to  the  nominal  capital;  for 
although  "  capital  stock  "  alone  may  refer  either 
to  the  nominal  capital  or  to  the  actual  capital  or 
assets,  yet  "  paid-up  capital  stock  "  cannot  well 
refer  to  anything  but  the  nominal  capital  stock. 
To  speak  of  the  "  paid-up  assets  "  of  the  company 

1  Act,  Par.  2,  lines  21-22  (infra  Appx.  I). 

2  Supra  §49. 

3  Act,  Par.  2,  lines  24-28  (infra  Appx.  I). 

4  1  Machen,  Mod.  Law  of  Corps.  §  497. 

5  State  v.  Taylor  (111.),  89  N.  E.  271;  People  ex  rel.  Union 
Trust  Co.  v.  Coleman,  126  N.  Y.  433;    27  N.  E.  818;    12 
L.  R.  A.  762  (with  annotation  and  citation  of  additional 
authorities). 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.         79 

would  be  absurd.  In  case  the  stock  is  illegally 
watered,  perhaps  only  so  much  of  the  nominal 
capital  should  be  taken  into  account  for  this  pur- 
pose as  is  legally  paid  up. 1  If,  however,  the  stock 
is  lawfully  credited  as  paid  up  though  without 
actual  payment  —  for  example,  in  case  of  a  mis- 
taken but  bona  fide  overvaluation  of  property 
accepted  as  payment  —  under  such  circumstances, 
the  full  amount  of  the  capital  credited  as  paid  up, 
and  not  merely  the  amount  represented  by  the 
actual  value  of  the  property  accepted  in  payment, 
should  be  regarded  as  "  paid-up  capital  stock " 
within  the  meaning  of  this  Act  of  Congress.  Thus 
an  additional  inducement  is  added  to  the  practice 
of  stock-watering  —  rather  a  curious  result  of  a 
statute  most  of  whose  advocates  profess  to  regard 
that  practice  with  abhorrence. 

§  62.  As  of  what  Date  Amount  of  Capital  Stock 
and  of  Indebtedness  is  to  be  Taken.  —  The  amount 
of  the  paid-up  capital  stock  is  to  be  estimated  at 
the  close  of  the  year;  for  the  language  is,  "  not 
exceeding  the  paid-up  capital  stock  .  .  .  outstand- 
ing at  the  close  of  the  year.77  2  It  would  seem  that 
the  amount  of  indebtedness  is  to  be  estimated  at 
the  same  time;  for  Paragraph  Three  requires  the 

1  But   compare   the   prevalent   American   doctrine   that 
shares  issued  at  a  discount  in  violation  of  law  are  never- 
theless to  be  taken  as  paid-up  as  against  all  the  world  except 
subsequent  creditors  of  the  company:    1  Machen,  Mod.  Law 
of  Corps.,  §  776. 

2  Act,  Par.  2,  lines  27-28  (infra  Appx.  I). 


80  FEDERAL   CORPORATION   TAX  LAW. 

company  to  make  a  return  of  "  the  amount  of  the 
bonded  and  other  indebtedness  ...  at  the  close 
of  the  year."  If,  however,  the  indebtedness  during 
the  earlier  part  of  the  year  exceeded  the  capital 
stock,  is  the  interest  paid  on  the  whole  amount  to 
be  deducted  merely  because  the  indebtedness  has 
been  reduced  below  the  capital  stock  before  the 
end  of  the  year  ?  In  truth,  the  limit  upon  the 
amount  of  interest  deductible  is  without  any 
justification  in  reason;  for  surely  the  larger  the 
indebtedness  on  which  a  company  is  obliged  to  pay 
interest,  the  smaller  is  its  income.  The  provision 
seems  intended  as  a  penalty  on  a  corporation  for 
contracting  an  indebtedness  in  excess  of  its  capital 
stock,  and  in  that  aspect  is  an  encroachment  on 
the  reserved  rights  of  the  states. 

§  63.  Force  of  Word  "  Outstanding  "  in  "  Capi- 
tal Stock  Outstanding  at  Close  of  the  Year." — 
The  reference  is  to  the  amount  of  the  paid-up 
capital  stock  "  outstanding  "  1  at  the  close  of  the 
year.  "  Outstanding,"  of  course,  means  issued,2 
and  not  validly  surrendered.  Stock  which  has 
been  acquired  by  the  company  itself  in  any  lawful 
way  —  by  forfeiture,  by  surrender  as  "  treasury 
stock,"  or  (where  a  purchase  by  a  company  of  its 
own  stock  is  deemed  lawful)  by  purchase,  —  is  of 
course  not  to  be  taken  as  outstanding; 3  but  on 

1  Act,  Par.  2,  line  27  (infra  Appx.  I). 

2  As  to  when  stock  can  be  deemed  "  issued,"  see  1  Machen, 
Mod.  Law  of  Corps.,  §  170- §174.    In  addition  to  cases  there 
cited,  see  Scott  v.  Abbot,  160  Fed.  573,  577. 

3  1  Machen,  Mod.  Law  of  Corps.,  §  633. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      81 

the  other  hand  shares  purchased  by  the  company 
ultra  vires  are  to  be  deemed  still  outstanding.  * 

§  64.  Indebtedness  of  Non-Stock  Corporations* 
—  In  the  case  of  companies  which  have  no  capital 
stock  there  is  no  limit  to  the  amount  of  indebted- 
ness interest  upon  which  may  be  deducted  from 
the  gross  income.  But  as  the  only  non-stock 
corporations  which  are  subject  to  the  Act  are, 
probably,  insurance  companies,  and  as  insurance 
companies  do  not  usually  have  a  large  funded 
debt,  this  absence  of  any  limitation  will  not  often 
be  very  important. 

§  65.  Interest  on  Indebtedness  in  Excess  of  the 
Paid-up  Capital.  —  If  the  indebtedness  exceeds 
the  paid-up  capital  stock,  can  interest  paid  on  the 
excess  be  deducted  from  the  gross  income  in  ascer- 
taining the  net  income  on  which  tax  is  to  be  paid?  2 
The  doctrine  has  been  advocated  above  that  the 
statutory  list  of  deductions  is  not  necessarily 
exhaustive; 3  but  even  if  that  doctrine  is  accepted 
as  sound,  it  is  hardly  applicable  here,  because 
of  the  negative  expression  "  not  exceeding."  4  If 
the  statute  had  provided  that  interest  on  indebted- 
ness up  to  a  given  amount  should  be  deducted, 

1 1  Machen,  Mod.  Law  of  Corps.,  §631.  But  see  United 
States  v.  Morse,  161  Fed.  429. 

2  As  to  the  general  question  whether  interest  on  funded 
debt  should  be  deducted  in  estimating  net  income  for  pur- 
poses of  taxation,  compare  Sioux  City  &  Pac.  R.  R.  Co.  v. 
United  States,  110  U.  S.  205;  3  Sup.  Ct.  Rep.  565. 

3  Supra    §45. 

4  Act,  Par.  2,  line  24  (infra  Appx.  I). 


82  FEDERAL   CORPORATION   TAX  LAW. 

the  argument  might  have  been  made  that  while  a 
deduction  of  interest  paid  on  that  amount  of 
indebtedness  was  commanded,  interest  paid  on  a 
larger  amount  was  not  forbidden.  But  when  the 
statute  says  that  interest  paid  on  debts  "  not 
exceeding  "  a  certain  amount,  shall  be  deducted, 
there  seems  to  be  a  direct  prohibition  of  a  deduc- 
tion of  interest  paid  on  a  greater  debt. 

§  66.  Money  Used  in  Paying  Principal  of  Debts 
—  Moneys  Added  to  Sinking  Funds.  —  The  Act 
makes  no  express  provision  for  deduction  from 
gross  income  of  amounts  devoted  to  payment  of 
debts.  Nevertheless,  as  already  indicated,  it  is 
submitted  that  sums  used  in  paying  floating  in- 
debtedness should  be  deducted,  either  as  part  of 
the  operating  expenses  or  because  the  statutory 
list  of  deductions  is  not  intended  to  be  exhaustive. l 
Money  used  in  paying  the  funded  debt  should  be 
charged  to  capital,2  and  therefore  should  not  be 
deducted  from  the  gross  income  in  order  to  arrive 
at  the  net  income.  The  Act  of  Congress,  accord- 
ingly, quite  properly  contains  no  provision  that 
money  used  for  payment  of  the  company's  bonded 
indebtedness  shall  be  deducted  from  the  gross 
income.  But  although  the  payment  of  the  funded 
debt  ought  not  to  be  paid  outright  as  an  income 
charge,  yet  it  is  quite  proper  to  lay  by  a  reasonable 
sum  from  the  gross  income  to  go  towards  a  sinking 
fund  to  pay  the  debt  at  maturity.  May  sums  so 

1  Supra  §  60. 

2  2  Machen,  Mod.  Law  of  Corps.,  §  1333,  §  2107. 


HOW   THE  TAXABLE   INCOME   IS   CALCULATED.     83 

laid  by  be  deducted  from  the  gross  income  for  the 
purposes  of  this  tax?  The  Act  does  not  expressly 
so  provide.  If  the  deduction  is  permissible  it 
must  be  either  because  the  statutory  list  of  deduc- 
tions is  not  exclusive,  or  because  reasonable  con- 
tributions to  a  sinking  fund  for  paying  the  funded 
debt  at  maturity  may  be  held  to  fall  within  the 
class  of  operating  expenses. 

§  67.  Interest  on  Bank  Deposits.  —  In  the  case 
of  a  banking  or  trust  company,1  the  Act  makes 
express  provision  that  "  all  interest  actually  paid 
by  it  within  the  year  on  deposits/7  even  though 
their  amount  may  exceed  the  paid-up  capital 
stock,  shall  be  deducted  from  the  gross  income. 
The  expression  "  actually  paid  "  should  be  par- 
ticularly noted.2  The  meaning  of  the  same  words 
in  other  parts  of  the  Act  has  already  been  con- 
sidered.3 They  would  seem  to  indicate  that  in- 
terest credited  to  the  depositor  but  not  actually 
paid  to  him  cannot  be  deducted,  —  a  queer  result. 
However,  the  provision  is  that  interest  "  paid 
within  the  year,"  and  not  interest  accruing  within 
the  year,  shall  be  deducted.  Hence,  if  it  should  be 

1  As  to  what  is  a  banking  company,  see  Bank  for  Savings  v. 
Collector,  3  Wall.  295  (savings  bank  held  to  be  "  engaged  in 
the  business  of  banking  "  within  the  meaning  of  a  tax  law); 
Selden  v.  Equitable  Trust  Co.,  94  U.  S.  419  (a  company 
engaged  in  business  of  investing  its  capital  in  bonds  and 
selling  same  with  its  guaranty  held  not  to  be  a  bank) . 

2  The  word  "  actually  "  is  omitted  in  the  corresponding 
clause  of  the  Third  Paragraph.    See  infra  §  98. 

3  Supra  §  49. 


84  FEDERAL  CORPORATION  TAX  LAW. 

held  that  interest  accruing  on  deposits  should  not 
be  deducted  from  the  income  of  the  year  within 
which  it  accrued,  because  although  credited  to 
the  despositor  it  was  not  actually  paid  to  him  in 
that  year,  still  it  can  be  deducted  from  the  income 
of  any  subsequent  year  in  which  it  may  be  actually 
paid. 

§  68.  Deduction  for  Taxes  —  In  General.  — 
The  next  deduction  expressly  directed  l  is: 

"  All  sums  paid  by  it,"  —  i.  e.,  the  company,  — 
"  within  the  year  for  taxes  imposed  under  the 
authority  of  the  United  States,  or  any  State  or 
Territory  thereof,  or  imposed  by  the  government 
of  any  foreign  country  as  a  condition  to  carry  on 
business  therein." 

Taxes  imposed  under  the  authority  of  any  state 
clearly  include  municipal  taxes  as  well  as  state 
taxes  properly  so  called.  The  tax,  in  order  to  be 
deducted  under  this  clause,  must  be  paid  within 
the  year.  It  is  not,  however,  necessary  that  it 
should  have  been  assessed  for  that  year,  but  it 
may  be  deducted  although  it  had  been  allowed  to 
fall  into  arrears  before  the  beginning  of  the  year. 

The  Act  does  not  expressly  require  that  the  taxes 
shall  have  been  assessed  against  the  company,  or 
that  either  the  company  or  its  property  should  be 
liable  therefor.  But  presumably,  a  purely  volun- 
tary payment  of  taxes,  for  which  neither  the  com- 
pany nor  its  property  is  in  any  way  liable,  would 
not  be  within  the  purview  of  the  clause.  On  the 

1  Act,  Par.  2,  lines  31-36. 


HOW   THE  TAXABLE   INCOME   IS   CALCULATED.     85 

other  hand,  taxes  which  are  assessed  upon  the 
several  shares  to  the  holders  thereof,  but  which  the 
law  may  require  the  corporation  to  pay,  would 
seem  to  be  included.1  The  fact  that  the  company 
may  have  a  right  of  reimbursement  against  its 
several  shareholders,  does  not,  under  this  statute, 
affect  the  right  to  deduct  the  tax  from  the  gross 
income.  If  the  Act  assesses  income  received  by 
the  company  as  trustee,  —  and  as  shown  above, 
at  least  on  the  face  of  its  language,  it  is  a  debatable 
question  whether  it  does  so,2  —  then  certainly 
taxes  assessed  against  the  company  as  trustee, 
and  paid  by  it  in  that  capacity,  should  be  deducted; 
otherwise  it  is  more  than  doubtful  whether  any 
deduction  for  such  taxes  should  be  allowed. 

§  69.  Special  Assessments  for  Betterments.  — 
Although  the  clause  evidently  applies  to  all  forms 
of  taxes,  —  on  real  estate  and  on  personal  property, 
direct  and  indirect,  customs,  duties,  excises, 
licenses,  and  all  other  kinds  of  taxes,  —  neverthe- 
less it  is  very  questionable  whether  special  assess- 
ments, or  local  betterment  assessments,  are  in- 
cluded. The  law  is  settled  that  an  exemption 
from  taxation  does  not  carry  an  exemption  from 
such  local  assessments; 3  but  in  view  of  the  strict- 

1  Of  course,  without  express  statutory  authority,  a  cor- 
poration would  not  be  entitled  to  deduct  such  taxes,  in  cal- 
culating its  income  for  purposes  of  a  law  taxing  its  "  earnings, 
income  or  gains"  :    Central  Nat.  Bank  v.  United  States,  137 
U.  S.  355;  11  Sup.  Ct.  Rep.  126. 

2  Supra  §  38. 

3  Ford  v.  Delta  etc.  Co.,  164  U.  S.  662;   17  Sup,  Ct.  Rep. 


86  FEDERAL  CORPORATION   TAX  LAW. 

ness  with  which  exemptions  from  taxation  are 
included,  those  decisions  are  not  in  point.  Other 
authorities,  however,  which  cannot  be  thus  dis- 
tinguished, hold  that  the  word  "  tax "  prima 
facie  excludes  special  assessments.1  The  Income 
Tax  Law  of  1894  expressly  declared  that  special 
assessments  should  not  be  deducted  in  estimating 
net  income  for  purposes  of  the  tax.2  On  the 
other  hand,  such  assessments  are  levied  in  exer- 
cise of  the  power  of  taxation,3  and  are  there- 
fore "  taxes "  in  the  broadest  sense  of  that 
word.4  The  conclusive  argument  against  allowing 
deductions  to  be  made  on  account  of  such  assess- 
ments is  that  they  are  levied  in  supposed  partial 
compensation  for  an  enhancement  in  the  value  of 
property  caused  by  a  local  improvement,  and  are 
therefore  in  the  nature  of  an  expense  for  per- 
manent improvements,  which  are  properly  charge- 
able to  capital  rather  than  income. 

§  70.  Foreign  Taxes.  —  The  only  foreign  taxes 
which  ar.e  required  to  be  deducted  are  those  which 
are  "  imposed  by  the  government  of  any  foreign 
country  as  a  condition  to  carrying  on  business 
therein."  Other  taxes,  such  as  ordinary  taxes  on 

230;  Illinois  Central  R.  R.  Co.  v.  Decatur,  147  U.  S.  190; 
13  Sup.  Ct.  Rep.  293. 

1  Lamar  Water  etc.  Co.  v.  Lamar,  32  L.  R.  A.  157,  165; 
128  Mo.  188;  26  S.  W.  1025;  31  S.  W.  756;  Page  &  Jones  on 
Taxation  by  Assessment,  §  39. 

2  Act,  Aug.  27,  1894,  c.  349,  §  28. 

3  Page  &  Jones  on  Taxation  by  Assessment,  §  8. 

4  Id.,  §40,  §41. 


HOW   THE  TAXABLE   INCOME   IS  CALCULATED.      87 

foreign  real  estate  owned  by  the  company  are 
not  required  to  be  deducted  under  this  head.  It 
is  possible,  however,  that  foreign  taxes  of  this 
latter  kind  might  be  allowed  to  be  deducted  under 
the  first  head  as  operating  expenses,  or  more 
particularly,  as  "  charges  such  as  rentals  or  fran- 
chise payments  required  to  be  made  as  a  condition 
to  the  continued  use  or  possession  of  property."  * 
§  71.  Dividends  on  Shares  in  Other  Companies 
—  In  General.  —  The  last  class  of  the  statutory 
deductions  to  be  made  by  the  company  comprises: 2 

"  All  amounts  received  by  it  within  the  year  as 
dividends  upon  the  stock  of  other  corporations, 
joint  stock  companies  or  associations,  or  insurance 
companies,  subject  to  the  tax  hereby  imposed." 

The  evident  general  intent  of  this  clause  is  to 
prevent  double  taxation,  —  a  laudable  purpose. 
The  deduction  which  it  directs  would  not  have  been 
permissible  if  the  Act  had  merely  proportioned  the 
tax  to  the  net  income,  without  directing  how  that 
net  income  should  be  ascertained.  Nevertheless 
the  clause  is  not  very  happily  drawn,  and  will 
probably  accomplish  some  rather  surprising  results. 
Most  of  these  could  be  avoided  if  the  words  "  sub- 
ject to  the  tax  hereby  imposed  "  could  be  read 
with  "  dividends  "  instead  of  with  "  corporations, 
joint  stock  companies  or  associations,  or  insurance 
companies."  The  clause  would  then  read,  "  All 

1  Supra  §  52. 

2  Act,  Par.  2,  lines  36-40  (infra  Appx.  I). 


88  FEDERAL  CORPORATION  TAX  LAW. 

amounts  received  by  it  from  dividends  subject 
to  the  tax  hereby  imposed."  This,  however,  not 
merely  involves  an  awkward  twisting  of  the  words, 
but  is  also  quite  inadmissible  because,  as  we  have 
seen,  this  tax  is  not  laid  upon  dividends  at  all.1 
In  order  to  have  accomplished  its  purpose,  the 
clause  ought  to  have  read,  "  All  amounts  received 
from  dividends  paid  out  of  income  subject  to  the 
tax  hereby  imposed. "  As  it  is,  very  unequal 
results  may  be  accomplished. 

§  72.  Dividends  on  Shares  in  Companies  Whose 
Net  Income  is  less  than  Five  Thousand  Dollars.  — 
The  first  question  is  whether  a  corporation  whose 
net  annual  income  is  less  than  five  thousand  dollars 
is  "  subject  to  the  tax,"  2  so  that  dividends  paid  by 
such  a  company  to  another  corporation  should  be 
deducted  from  the  latter' s  net  income.  It  seems 
that  this  question  should  be  answered  in  the 
affirmative.3  If  so,  a  double  exemption  of  five 
thousand  dollars  is  allowed,  and  a  door  is  opened 
for  an  evasion  of  the  tax.  For  instance,  a  corpora- 
tion whose  annual  income  is  twenty-five  thousand 
dollars,  desiring  to  avoid  the  tax,  may  organize 
five  subsidiary  corporations,  and  divide  its  business 
among  them,  taking  their  stock  in  exchange. 
Each  company  would  then  have  an  income  of  but 
five  thousand  dollars,  and  no  tax  at  all  would  be 
payable.  Of  course,  the  exemption  of  five  thousand 

1  Supra,  §13. 

2  Act,  Par.  2,  line  40  (infra  Appx.  I). 

3  Infra  §87. 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      89 

dollars  is  so  small  that  this  process  of  subdivision 
is  not  likely  to  be  resorted  to  by  any  considerable 
number  of  corporations.  The  increase  of  expenses 
caused  by  subdivision  into  such  small  corporations, 
to  say  nothing  of  the  resulting  inconvenience, 
would  be  greater  than  the  tax. 

§  73.  Dividends  on  Shares  in  Foreign  Com- 
panies. —  A  similar  question  is  whether  dividends 
paid  to  a  domestic  company  on  shares  in  a  foreign 
company  are  to  be  deducted  from  the  income  of 
the  domestic  company  for  purposes  of  the  tax, 
merely  because  the  foreign  company  may  transact 
a  small  portion  of  its  business  in  this  country,  and 
may  thus  become  "  subject  to  the  tax."  It  would 
seem  that  this  question  should  be  answered  in  the 
affirmative:  for  the  language  of  the  statute  is  quite 
clear,  that  all  dividends  on  stock  of  companies 
which  are  "  subject  to  the  tax  "  are  exempt;  and 
surely  a  foreign  company  which  is  compelled  to 
pay,  and  actually  does  pay  a  tax  under  this  law 
is  "  subject  to  the  tax." 

§  74.  Meaning  of  "  Dividends "  in  this  Con- 
nection. —  The  last  question  in  connection  with 
this  clause  of  the  Statute  is  as  to  the  meaning  of 
the  word  "  dividends."  l  Although  it  may  be 

1  Act,  Par.  2,  line  37  (infra  Appx.  I).  As  to  the  meaning 
of  the  word  in  a  tax  law,  see  Bailey  v.  Railroad  Co.,  22  Wall. 
604;  Cary  v.  Savings  Union,  22  Wall.  38;  Bailey  v..  Railroad 
Co.,  106  U.  S.  109;  1  Sup.  Ct.  Rep.  62.  As  to  whether  the 
word  includes  stock  dividends,  see  1  Machen,  Mod.  Law  of 
Corps.,  p.  495,  note  5;  and  also  Chicago  etc.  R.  R.  Co.  v. 
Page,  1  Biss.  461  (statute  taxing  "  dividends  in  scrip  or 


90  FEDERAL  CORPORATION  TAX  LAW. 

true  that  only  such  dividends  as  constitute  income, 
as  distinguished  from  an  accretion  to  the  share- 
holder's capital,  are  intended  to  be  deducted  under 
this  head,  yet  the  vexed  questions  that  arise 
between  a  tenant  for  life  and  a  remainderman, 
when  an  extraordinary  dividend  is  claimed  by  the 
one  as  income  and  by  the  other  as  capital,1  cannot 
become  very  material  here; 2  for  if  we  assume  that 
an  extraordinary  dividend  is  capital  and  therefore 
ought  not  to  be  deducted  from  the  gross  income 
as  "  dividends  "  on  the  stock  of  another  company 
subject  to  the  tax,  then  it  must  follow  that  the 
amount  thereof  ought  not  to  be  included  in  the 
estimate  of  gross  income.  It  is  therefore  as  broad 
as  it  is  long;  anything  that  ought  to  be  included 
in  the  gross  income  ought,  if  it  was  received  in 
respect  of  ownership  of  shares  in  a  company  subject 
to  the  tax,  to  be  deducted  as  a  dividend.  Thus  it 
would  seem  clear  that  dividends  in  liquidation 
are  not  deductible  as  dividends;  for  they  are  paid 
out  of  capital,  and  not  income;  but  if  that  be 
true,  neither  ought  they  to  be  included  in  the  esti- 
mate of  gross  income.  It  may  be  urged  that  the 
word  "  amounts  "  in  the  expression  "  all  amounts 

money  "  held  not  to  apply  to  stock  issued  to  shareholders 
to  represent  their  interest  in  property  acquired  by  the  com- 
pany with  accumulated  profits  prior  to  the  passage  of  the 
statute).  The  expression  "  amounts  received  "  as  dividends 
in  this  statute  might  seem  to  indicate  that  Congress  had 
only  cash  dividends,  and  not  stock  dividends,  in  mind. 

1  See  2  Machen,  Mod.  Law  of  Corps.,  §  1377-§1395. 

2  See  also  supra  §  34. 


HOW   THE   TAXABLE    INCOME   IS    CALCULATED.      91 

received  by  it  within  the  year  as  dividends  "  J 
should  be  taken  to  imply  that  only  cash  dividends, 
as  distinguished  from  'stock  or  scrip  dividends, 
or  dividends  payable  in  property,  are  intended; 
but  that  construction  would  be  very  narrow. 

§  75.  Method  of  Calculating  Taxable  Income  of 
Foreign  Companies  —  In  General.  —  We  next  con- 
sider the  method  of  ascertaining  the  amount  of 
income  upon  which  foreign  companies  are  taxed. 
As  already  stated,  no  foreign  company  is  subject 
to  the  tax,  unless  it  is  "  engaged  in  business  "  in 
the  United  States ; 2  and  the  meaning  of  the  words 
"  engaged  in  business  "  in  this  connection  have 
already  been  discussed.3  If,  however,  a  foreign 
company  is  engaged  in  business  in  this  country, 
it  is  taxable  not  merely  upon  the  net  income  of 
that  business,  but  also  upon  the  income  derived 
from  "  capital  invested  "  within  the  United  States, 
including  Alaska.  The  method  prescribed  in  the 
Act  for  ascertaining  the  net  income  upon  which 
foreign  corporations  are  taxable  does  not  differ 
from  that  which  is  prescribed  with  respect  to 
domestic  companies,  except  in  so  far  as  may  be 
rendered  necessary  by  the  fact  that  foreign  com- 
panies are  not  taxable  upon  their  total  net  income, 
but  only  upon  so  much  thereof  as  is  derived  from 
business  transacted  and  capital  invested  in  this 
country. 

1  Act,  Par.  2,  lines  36-37  (infra  Appx.  I). 

2  Supra    §28. 

3  Supra    §28. 


92  FEDERAL   CORPORATION   TAX  LAW. 

§  76.  Gross  Income  "  From  Business  Trans- 
acted and  Capital  Invested  in  the  United  States."  — 
The  first  step  prescribed  in  the  statute  towards 
ascertaining  the  taxable  net  income  of  foreign 
companies  is  to  find  the  gross  income  from  business 
transacted  and  capital  invested  within  the  United 
States,  received  within  the  year.1  We  have 
already  considered  the  question,  what  is  "  gross 
income/'  2  and  what  is  meant  by  the  word  "  re- 
ceived. "  3  As  these  questions  are  precisely  the 
same  in  the  case  of  foreign  companies  as  in 
the  case  of  domestic  companies,  a  repetition 
of  that  discussion  would  be  superfluous.  More- 
over, the  question,  what  is  "  business  transacted 
within  the  United  States  "  is  necessarily  answered 
by  the  discussion  which  has  been  already  had  as 
to  the  meaning  of  the  words  "  engaged  in  business  " 
in  the  United  States.4  As,  therefore,  we  are  en- 
abled from  what  has  gone  before  to  understand 
what  is  meant  by  "  gross  income  received  within 
the  year,"  and  by  "  business "  which  is  trans- 
acted, or  in  which  the  company  may  be  engaged, 
within  the  United  States,  little  further  discussion 
is  necessary  in  order  to  determine  the  meaning  of 
"  gross  income  received  from  business  transacted 
within  the  United  States." 

§  77.  How  to  Apportion  Profits  Between  that 
Part  of  Business  Transacted  in  the  United  States, 

1  Act,  Par.  2,  lines  41-50  (infra  Appx.  I). 

2  Supra  §  33-  §36,  §  38-§  44. 

3  Supra  §37.  4  Supra  §28. 


HOW   THE   TAXABLE   INCOME  IS   CALCULATED.     93 

and  that  Part  Transacted  Abroad.  —  The  question, 
however,  of  the  apportionment  of  the  company's 
profits  between  that  part  of  its  business  which  is 
carried  on  in  the  United  States,  and  that  part 
which  is  carried  on  abroad,  is  not  always  easy  of 
solution.1  The  same  or  a  similar  question  has 
repeatedly  arisen  under  the  British  and  Colonial 
income-tax  laws.  Where  a  telegraph  company 
operated  a  cable  from  Australia  to  India,  it  was 
held  that  so  much  of  its  receipts  as  represented 
its  portion  of  the  price  charged  for  telegraphic 
messages  from  New  Zealand  to  Europe,  were  not 
derived  from  business  done  in  New  Zealand,  al- 
though the  company  maintained  an  office  in  that 
colony; 2  but  on  the  other  hand,  where  a  telegraph 
company  maintained  and  operated  a  cable  from 
England  to  the  continent,  it  was  held  that  all 
profits  made  by  the  company  on  messages  from 
England  to  foreign  countries  were  to  be  taken  as 
derived  from  trade  exercised  within  the  United 
Kingdom.3  Where  a  company  operated  a  mine 
in  New  South  Wales,  and  refined  its  ores  there, 
it  .was  held  that  some  part  at  least  of  the  profit 
made  on  sales  of  the  completed  product  in  other 
colonies  or  countries  arose  from  business  carried 

1  As  to  the  general  question,  what  amounts  to  income 
from   business   as    distinguished   from   income   from    other 
sources,  see  supra  §  43. 

2  Commissioner  for  Taxes  v.  Eastern  Extension  etc.  Tel. 
Co.  (1906),  A.  C.  526. 

3  Ericksen  v.  Last,  8.  Q.  B.  D.  414. 


94  FEDERAL   CORPORATION   TAX   LAW. 

on  in  New  South  Wales,  and  as  such  was  assessable 
there  for  income  tax;  *  but  whether  some  part  of 
the  profit  should  be  exempt  as  not  having  been 
earned  in  New  South  Wales,  does  not  appear  to 
have  been  decided.  Profits  in  the  shape  of  com- 
missions on  sales  made  in  London  upon  consign- 
ments solicited  and  made  in  New  Zealand  do  not 
arise  out  of  business  transacted  in  that  colony.2 
When  an  English  member  of  an  American  firm 
purchased  goods  in  England  and  shipped  them  to 
New  York,  where  they  were  sold  at  a  profit,  it 
was  held  that  no  part  of  that  profit  should  be 
deemed  to  arise  from  the  business  carried  on  in 
England,  and  that  therefore  no  part  thereof  was 
liable  to  income  tax  in  England.3 

§  78.  What  is  Income  from  Capital  Invested  in 
United  States.  —  The  expression  "  capital  invested 
within  the  United  States "  4  introduces  a  new 
term.5  When  may  capital  be  said  to  be  invested 

1  Commissioners  of  Taxation  v.  Kirk  (1900),  A.  C.  588. 

2  Lovell  &  Christmas  v.  Commissioner  of  Taxes  (1908), 
A.  C.  46  (more  fully  stated  supra  §  28,  and  note). 

3  Sully  v.  Attorney  General,  5  H.  &  N.  711. 

4  Act,  Par.  2,  lines  47-48  (infra  Appx.  I). 

5  It  has  been  held  that  a  tax  on  the  "  capital  "  of  in- 
corporated and  private  bankers  does  not  include  deposits 
and  money  temporarily  borrowed:   Bailey  v.  Clark,  21  Wall. 
284.    On  the  other  hand,  it  does  include  profits  accumulated 
and  retained  throughout  a  period  of  years  as  part  of  the  com- 
pany's working  capital,  though  carried  on  its  books  under 
the  head  of  "  profit  and  loss  ":  Leather  Mnfrs.  Nat.  Bank  v. 
Treat,  128  Fed.  262;  62  C.  C.  A.  644. 

New  York  has  taxed  the  "  capital  employed  "  by  corpo- 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      95 

in  this  country?  Of  course;  land  in  the  United 
States  owned  by  a  foreign  company  is  capital 
invested  in  this  country.  So  also,  tangible  personal 
property  permanently  located  in  America  probably 
falls  within  the  same  category.  The  difficulty 
arises  with  respect  to  intangible  property. 

When  a  foreign  corporation  owns  shares  in  a 
domestic  company,  can  it  be  said  that  the  shares 
so  owned  constitute  "  capital  invested  in  the 
United  States."  1  This  question  is  immaterial; 
because  the  domestic  company  would  be  liable 
to  the  tax,  and  therefore  income  derived  by  the 

rations  within  the  state:  New  York  State  v.  Roberts,  171 
U.  S.  658;  19  Sup.  Ct.  Rep.  58.  These  words  in  the  New 
York  statute  have  been  construed  in  the  following  cases, 
among  others:  People  v.  Campbell,  138  N.  Y.  543;  34  N.  E. 
370;  20  L.  R.  A.  453;  People  v.  Wemple,  148  N.  Y.  690; 
43  N.  E.  176;  People  v.  Wemple,  133  N.  Y.  323;  People  v. 
Am.  Bell  Tel.  Co.,  117  N.  Y.  241;  22  N.  E.  1057.  But  the 
New  York  cases  decided  under  this  statute  expressly  draw 
a  distinction  between  "  capital  employed  "  in  the  state  and 
capital  which  is  merely  "  invested  "  therein.  People  ex  rel. 
Wall.  etc.  Co.  v.  Miller,  181  N.  Y.  328,  331;  People  ex.  rel. 
Fort  George  Realty  Co.  v.  Miller,  179  N.  Y.  49,  52-53;  People 
ex  rel.  Singer  Mfg.  Co.  v.  Wemple,  150  N.  Y.  46,  49;  People 
ex  rel.  Niagara  etc.  Co.  v.  Roberts,  30  N.  Y.  App.  Div.  180, 
182,  affirmed  on  opinion  below,  157  N.  Y.  676.  Hence, 
New  York  cases  decided  under  that  statute  bear  only  in- 
directly upon  the  construction  of  the  words  "  capital  in- 
vested "  in  the  federal  law. 

1  Cf.  People  v.  Campbell,  138  N.  Y.  543;  34  N.  E.  370; 
20  L.  R.  A.  453;  People  v.  Wemple,  148  N.  Y.  690;  43 
N.E.176;  People  v.  Am.  Bell  Tel.  Co.,  1 17  N.Y.  241;  22N.E. 
1057. 


96  FEDERAL   CORPORATION   TAX  LAW. 

foreign  company  from  its  shares  would  be  exempt, 
even  though  those  shares  should  be  held  to  be 
capital  invested  in  the  United  States. 

But  suppose  a  foreign  company  holds  a  mortgage 
upon  land  or  tangible  personal  property  situated 
in  this  country.  For  example,  suppose  a  foreign 
corporation  holds  mortgage  bonds  of  a  domestic 
company,  can  it  be  said  that  these  bonds  represent 
capital  invested  in  this  country?  *  The  problem 
is  not  easy  of  solution.  If  the  domestic  company 
is  also  transacting  business  abroad,  and  if  the  bonds 
are  secured  by  mortgage  of  its  foreign  property  as 
well  as  of  its  property  situated  in  this  country, 
the  question  becomes  still  more  complex. 

It  seems  that  bonds  deposited  by  a  foreign 
insurance  company  with  a  state  official  to  secure 
local  policy-holders  are  capital  of  the  company  in 
that  state.2 

§  79.  Deductions  from  Gross  Income  by  Foreign 
Companies  —  In  General.  —  The  deductions  ex- 
pressly directed  to  be  made  are  the  same  as  in 
the  case  of  domestic  companies,  with  certain 
differences  arising  out  of  an  attempt  by  Congress 
to  apportion  the  company's  expenses  between  its 
business  in  this  country  and  in  its  own  domicile. 

1  Cf.  People  v.  Campbell,  138  N.  Y.  543;    34  N.  E.  370; 
20  L.  R.  A.  453  (bonds  of  a  foreign  corporation  owned  by  a 
New  York  company  and  presumed  to  be  at  its  home  office, 
held  to  be  taxable  to  the  New  York  company  as  "  capital 
employed  "  in  New  York). 

2  Scottish  Union  etc.  Ins.  Co.  v.  Bowland,  196  U.  S.  611, 
630. 


HOW   THE   TAXABLE    INCOME   IS    CALCULATED.      97 

§  80.  Operating  Expenses  of  Foreign  Com- 
panies. —  With  respect  to  what  thus  may  be 
deducted  as  operating  expenses,  the  rules  pre- 
scribed by  the  Act  l  are  almost  word  for  word 
the  same  as  those  with  respect  to  domestic  com- 
panies,2 except  that  they  are  confined  to  the  opera- 
tion and  maintenance  of  business  and  property 
within  the  United  States.  Two  verbal  varia- 
tions, —  namely,  the  use  of  the  word  property  in 
the  singular  instead  of  the  plural  number,  and 
the  substitution  of  "  earnings  "  for  "  income/'  in 
the  expression  "  paid  out  of  income,"  —  have 
been  already  considered  and  shown  to  be  immate- 
rial.3 As  we  have  just  considered  the  meaning 
of  "  business  transacted  "  and  "  capital  invested  " 
in  the  United  States,  this  class  of  deductions  calls 
for  little  further  comment.  In  the  corresponding 
clause  with  respect  to  the  return  required  to  be 
made  by  foreign  companies,  the  Act,  apparently, 
per  incuriam,  omits  the  word  "  property,"  4  so 
that  foreign  companies  are  not  required  to  state 
in  their  return  the  expense  of  maintaining  their 
property  in  this  country;  but  as  they  are  entitled 
to  a  deduction  therefor,  they  should  certainly  be 
permitted  to  do  so. 

§  81.  Losses  by  Foreign  Companies.  —  The 
clause  respecting  deductions  for  losses  by  foreign 

1  Act,  Par.  2,  lines  50-58  (infra  Appx.  I). 

2  As  to  which  see  supra  §  46- §  52. 

3  Supra  §  48  and  §  50. 

4  See  infra  §96. 


98  FEDERAL   CORPORATION   TAX   LAW. 

companies  1  is  confined,  so  far  as  express  language 
goes,  to  losses  sustained  in  "  business  conducted  "  2 
in  the  United  States,  and  does  not  expressly 
include  losses  of  capital  invested  in  this  country. 
It  would  seem,  however,  that  this  omission  is  an 
inadvertence,  for  if  the  foreign  company  is  to  be 
taxed  on  income  derived  from  capital  invested 
in  this  country,  there  would  be  no  justice  in 
refusing  to  it  the  privilege  which  is  allowed  to 
domestic  companies,  of  deducting  from  income 
received  the  amount  of  invested  capital  lost. 
This  conclusion  is  fortified  by  the  express  pro- 
vision applicable  to  foreign  as  well  as  to  domestic 
companies,  that  losses  shall  include  "  a  reasonable 
allowance  for  depreciation  of  property,  if  any."  3 
Although  this  expression  must  be  confined  by 
construction  to  losses  by  depreciation  of  property 
situated  in  this  country,  it  would  seem  to  be  broad 
enough  to  include  losses  of  invested  capital  as 
well  as  losses  in  business.  In  all  other  respects, 
the  clause  respecting  deductions  for  losses  is  word 
for  word  the  same  as  the  corresponding  clause 
applicable  to  domestic  companies.4  The  pro- 
visions as  to  deductions  by  insurance  companies  5 

1  Act,  Par.  2,  lines  58-69  (infra  Appx.  I). 

2  As  to  what  is  a  loss  in  a  given  business,  as  distinguished 
from  a  loss  in  another  business  conducted  by  the  same  in- 
dividual, compare  Brown  v.  Watt,  50  J.  P.  583. 

3  Act,  Par.  2,  lines  63-65  (infra  Appx.  I). 

4  As  to  the  construction  of  which  see  supra,  §  53- §  57. 

5  Act,  Par.  2,  lines   65-69  (infra  Appx.  I).     Cf.    supra 
§58,   §59. 


HOW   THE   TAXABLE   INCOME   IS  CALCULATED.     99 

for  sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts,  and  for 
additions  required  by  law  to  be  made  to  reserve 
funds,  is  not  expressly  confined  to  losses  incurred 
in  policies  written  in  the  United  States,  or  to 
additions  to  reserve  funds  required  to  be  made  by 
the  laws  of  the  United  States  or  any  of  them;  but 
such  will  probably,  —  and .  rightly,  —  be  its  con- 
struction. 

It  has  been  held  in  England  that  damages  paid  by 
a  brewing  company  to  a  customer  in  an  inn,  which 
was  carried  on  by  a  manager  as  part  of  the  com- 
pany's business,  for  damages  sustained  in  conse- 
quence of  negligence  of  a  servant,  is  not  a  loss 
"  connected  with  or  arising  out  of  the  company's 
trade."  * 

§  82.  Interest  on  Indebtedness  Paid  by  Foreign 
Companies.  —  The  clause  respecting  deductions 
for  interest  paid  by  the  foreign  company  on  its 
bonded  and  other  indebtedness  2  is  the  same  as 
the  corresponding  provision  with  respect  to  do- 
mestic companies,3  except  that  the  limit  of  the 
amount  of  indebtedness  interest  paid  upon  which 
may  be  deducted,  instead  of  being  the  total 
amount  of  outstanding  paid-up  capital  stock  of 
the  company,  as  in  the  case  of  domestic  companies, 
is  an  amount  "  not  exceeding  the  proportion  of 
its  paid-up  capital  stock  outstanding  at  the  close 

1  Strong  &  Co.  v.  Woodifield  (1906),  A.  C.  448. 

2  Act,  Par.  2,  lines  70-81  (Infra  Appx.  I). 

3  As  to  which,  see  supra  §  60- §  67. 


ft 

100      FEDERAL  CORPORATION  TAX  LAW. 

of  the  year  which  the  gross  amount  of  its  income 
for  the  year  from  business  transacted  and  capital 
invested  in  the  United  States  and  any  of  its  Terri- 
tories, Alaska,  and  the  District  of  Columbia,  bears 
to  the  gross  amount  of  its  income  derived  from 
all  sources  within  and  without  the  United  States;  " 
and  except  that  foreign  banking  companies,  if 
there  be  any  such  doing  business  in  the  United 
States,  are  not  allowed  to  deduct  interest  paid  on 
their  deposits  in  excess  of  the  limit  of  indebtedness 
as  just  stated.1 

It  will  be  observed  that  this  indebtedness, 
interest  upon  which  may,  if  paid  within  the  year, 
be  deducted  from  the  gross  income  of  foreign 
companies  from  business  transacted  and  capital 
invested  in  the  United  States,  is  not  confined  to 
debts  contracted  in  the  course  of  the  business 
carried  on  in  this  country.  But  the  fact  that  the 
limit  is  fixed  by  the  proportion  between  the  income 
received  from  American  business  and  property, 
and  its  total  income  from  all  sources,  casts  upon 
it,  as  will  presently  be  more  fully  explained,  the 
heavy  burden  of  making  a  return  of  the  total 
amount  of  its  income  from  all  sources.  It  is  sub- 
mitted that  this  is  an  unjust  burden  to  put  upon 
foreign  companies,  and  that  the  law  ought  to  be 
amended  so  as  to  obviate  the  necessity  for  it. 

§  83.     Taxes    Paid    by    Foreign    Companies.  - 
With  respect  to  the  deduction  for  taxes,  the  pro- 

1  Act,  Par.  2,  lines  71-81  (infra  Appx.  I). 


HOW   THE   TAXABLE   INCOME   IS   CALCULATED.      I(jl 

vision  1  is  the  same  as  that  applicable  to  domestic 
companies,  except  that  it  is  confined  to  "  taxes 
imposed  under  the  authority  of  the  United  States 
or  of  any  State  or  Territory  thereof ,"  and  does  not 
include  any  taxes  whatsoever  imposed  by  the 
laws  of  any  foreign  country.  In  all  other  respects 
the  same  considerations  stated  above  with  refer- 
ence to  domestic  companies  are  applicable.2 

§  84.  Dividends  on  Shares  in  Other  Companies 
held  by  Foreign  Corporations.  —  As  to  deductions 
for  dividends  received  by  the  company  within  the 
year  on  stock  of  other  companies,3  the  provision 
is  in  all  respects  precisely  identical  with  the  cor- 
responding provision  as  to  domestic  companies, 
and  should  therefore  receive  the  same  interpre- 
tation.4 

§  84A.  For  what  Period  Income  is  Calculated.  — 
Throughout  the  First  and  Second  Paragraphs,  the 
Act  repeatedly  uses  the  expression  "  within  the 
year,"  and  other  equivalent  words.  Every  com- 
pany shall  be  subject  to  pay  "  annually  "  5  the 
tax  in  question,  equivalent  to  one  per  cent  of 
its  net  income  "  during  such  year  "  ;  6  and  that 
income  is  to  be  ascertained  by  taking  the  gross 
income  received  "  within  the  year,"  7  and  deducting 

1  Act,  Par.  2,  lines  81-84  (infra  Appx.  I). 

2  Supra  §  68,  §  69. 

3  Act,  Par.  2,  lines  85-89  (infra  Appx.  I). 

4  As  to  which,  see  supra  §  71- §  74. 

5  Act,  Par.  1,  line  13  (infra  Appx.  I). 

6  Act,  Par.  1,  lines  19-20  and  line  30  (infra  Appx.  I)< 

7  Act,  Par.  2,  line  5,  lines  46-47  (infra  Appx.  I). 


102      FEDEBAL  CORPORATION  TAX  LAW. 

therefrom  certain  expenses  incurred  "  within  the 
year."  1  But  nowhere  in  those  two  paragraphs 
does  it  appear  when  the  year  is  to  begin  and  end. 
This  appears  for  the  first  time  in  the  Third  Para^ 
graph,2  at  the  commencement  of  which  it  ia 
1  stated  that  the  tax  is  to  be  computed  for  the  first 
year  on  the  income  of  the  year  ending  December 
31st,  1909,3  and  so  on  for  each  calendar  year 
thereafter. 

1  Act,  Par.  2,  lines  7,  13,  18,  20-21,  22,  30,  31-32,  37,  51, 
59,  66-67,  69,  70,  82,  85-86  (infra  Appx.  I).     Note  also  the 
recurring   expression    "  at    the    close   of   the    year."     Act, 
lines  27-28,  74-75. 

2  Act,  Par.  3,  lines  10-12  (infra  Appx.  I). 

3  As  to  whether  this  includes  the  portion  of  the  year  which 
had  elapsed  when  the  Act  took  effect,  see  supra  §  29,  §  39. 


CHAPTER   V 

THE   RETURN 

§  85  Importance. 

§  86  When  to  be  made. 

§  87  By  what  companies  to  be  made. 

§  88  By  whom  and  how  to  be  sworn  to. 

§  89  To  whom  to  be  made. 

§  90  Control  of  Commissioner  of  Internal  Revenue  over. 

§§  91-100  What  the  return  should  contain. 

§  91  Amount  of  capital  stock. 

§  92  Amount  of  indebtedness. 

§  93  Gross  income. 

§  94  Dividends  received  from  other  companies. 

§§  95-99  Amount  claimed  as  deductions. 

§  95  In  general. 

§  96  (1)   Expenses  of  maintenance  and  operation,  etc. 

§  97  (2)   Losses  sustained. 

§98  (3)   Interest  paid  on  indebtedness. 

§  99  (4)   Taxes  paid. 

§  99A  Net  income. 

§  100  Additional  matters  not  required  by  the  Act  to  be 
stated. 

§  101  Duty  of  company  where  an  accurate  return  is  im- 
possible. 

§  102  Disposition  of  the  return. 

§  103  Effect  of  the  return. 

§  104  Failure  to  make  return. 

§  105  Returns  incomplete  on  their  face. 


104    FEDERAL  CORPORATION  TAX  LAW. 

§§  106-114  Correcting  the  return. 

§  106  Preliminary  proceedings  before  Commissioner  of 
Internal  Revenue. 

§  107  Further  proceedings  —  requiring  additional  infor- 
mation from  the  company. 

§  108        Examination  of  books  and  taking  of  testimony. 

§  109        Court  proceedings. 

§  110  Defences. 

§  111  Costs. 

§  112        Decision  of  Commissioner  on  evidence  so  acquired. 

§  113         Period  of  limitations. 

§  114        Correcting  return  by  action  of  debt  for  taxes  due. 

§  115    Penalties  for  erroneous  returns. 

§  116    Returns  as  public  records. 

§  117    Protection  against  disclosure  of  secrets. 

§  118    Returns  not  affected  by  other  statutes. 

§  85.  Importance.  —  Nothing  connected  with 
the  Act  is  more  important  than  the  matter  of  the 
preparation  and  correction  of  the  return.  For 
while  the  amount  of  the  tax  is  not  very  heavy, 
being  only  one  per  cent  of  the  net  income  in  excess 
of  five  thousand  dollars,  yet  the  fact  that  the 
return  is  required  to  state,  as  matter  of  public 
record  open  to  inspection  by  all  comers,  many 
facts  in  regard  to  the  business  which  most  purely 
private  corporations  would  be  very  loth  to  reveal, 
and  the  further  fact  that  the  correction  of  the 
return  may  involve  an  inquisitorial  inspection  of 
the  company's  books  and  examination  of  its 
officers,  and  that  the  President  may  direct  all 
the  information  so  acquired  to  be  published,  — 
these  facts  make  the  law  very  onerous. 

§  86.    When  to  be  Made.  —  The  return  is  re- 


THE  HETtJRtf.  105 

quired  to  be  made  on  or  before  the  first  day  of 
March  in  each  year.1  The  companies  subject  to 
the  tax  must  at  their  peril  inform  themselves  of 
this  fact.  It  is  not  made  the  duty  of  any  govern- 
ment officer  or  employee  to  give  them  notice,  or 
to  warn  them  of  their  obligation,  or  to  furnish 
them  with  forms,  blanks,  or  instructions  for  their 
guidance  in  making  up  the  returns;  and  failure 
to  receive  the  usual  blanks  is  no  excuse  for  failing 
to  make  the  return.2  In  case  of  the  absence  or 
illness  of  an  officer,  or  for  any  other  good  reason, 
the  collector  may  allow  such  further  time,  not 
exceeding  thirty  days,  after  March  1st,  as  he  may 
think  proper.3 

§  87.  By  What  Companies  to  be  Made.  —  A 
return  must  be  made  by  every  corporation  "  sub- 
ject to  the  tax."  4  It  seems  that  these  words 
include  all  companies  which  would  be  liable  to 
the  tax  if  their  income  were  sufficient;  and  there- 
fore include  companies  whose  net  income  is  less 
than  five  thousand  dollars  a  year  or  whose  net 
income  is  derived  from  exempted  sources.5  Such 
at  least  is  the  interpretation  of  the  Act  by  the 
Commissioner  of  Internal  Revenue.6 

§  88.     By  Whom  and  How  to  be  Sworn  to.  — 

1  Act,  Par.  3,  lines  12-15  (infra  Appx.  I). 

2  U.  S.  Int.  Rev.  Regs.  No.  31,  Dec.  3d,  1909,  Art.  6 
(infra  Appx.  II).  3  Act,  Par.  5,  lines  8-16. 

4  Act,  Par.  3,  lines  20-21  (infra  Appx.  I). 

5  See  supra  §  72,  §  73. 

6  U.  S.  Int.  Rev.  Regs-Jfo.  31,  Dec.  3d,  1909,  Art.  1  (infra 
Appx.  II). 


106      FEDERAL  CORPORATION  TAX  LAW. 

The  return  is  required  to  be  sworn  to  by  the 
"  president,  vice-president  or  other  principal  offi- 
cer "  of  the  company,  and  also  by  its  "  treasurer 
or  assistant  treasurer. "  1  Any  person  performing 
the  duties  of  a  treasurer  would  probably  be  deemed 
a  treasurer  quoad  hoc.  Doubtless,  it  is  sufficient 
for  the  officers  mentioned  to  make  oath  to  the 
best  of  their  knowledge,  information  and  belief; 2 
for  since  the  Act  specifies  the  officers  who  are  to 
swear  to  the  report  and  does  not  require  that  it 
shall  be  sworn  to  by  a  person  having  personal 
knowledge  of  the  facts  stated  therein,  no  other 
rule  would  be  possible. 

The  Act  does  not  specify  the  officers  by  whom 
the  oath  is  to  be  administered.  It  may,  therefore, 
be  administered  by  any  officer  empowered  to  do 
so  by  general  law  —  a  clerk  or  deputy  clerk  of  a 
United  States  Court  or  a  United  States  Commis- 
sioner,3 or  by  a  notary  public,4  or  by  the  collector 
or  deputy  collector.5 

1  Act,  Par.  3,  lines  15-18  (infra  Appx.  I). 

2  The  form  of  oath  may  be  prescribed  by  the  Secretary 
of  the  Treasury.     See   Rev.   Stats.   §251  (1  U.  S.  Comp. 
Stats,  p.  138),  and  infra  §  128.    The  affidavits  appended  to 
the  printed  forms  of  returns  sent  out  by  the  Treasury  De- 
partment are  to  be  made  to  the  best  of  the  affiant's  "  knowl- 
edge and  belief  and  from  such  information  as  he  has  been 
able  to  obtain."    See  infra  Appx.  III. 

3  Act  March  2,  1901,  c.  814,  amending  Act  May  28,  1896, 
c.  252,  §  19  (  1  U.  S.  Comp.  Stats.  499). 

4  Act  Aug.  15,  1876,  c.  304  (1  U.  S.  Comp.  Stats.  662-663). 

5  Rev.  Stats.  §  3165  (2  U.  S.  Comp.  Stats,  p.  2057),  infra 
§130. 


THE  RETURN.  107 

§  89.  To  Whom  to  be  Made.  —  The  return 
must  be  made  to  the  collector  of  internal  revenue 
for  the  revenue  district  in  which  the  company  in 
question  has  its  "  principal  place  of  business,"  l 
or  in  the  case  of  a  foreign  company  to  the  collector 
of  the  district  in  which  is  situated  "  the  place 
where  its  principal  business  is  carried  on  in  the 
United  States."  2  In  the  case  of  domestic  com- 
panies, does  "  principal  place  of  business  "  refer 
to  its  home  office,  or  place  designated  in  its  charter 
or  incorporation  paper  as  its  chief  office  or  place 
of  business,  or  to  the  place  where  in  fact  its  most 
important  business  may  be  transacted?  The 
question  is  not,  theoretically,  easy  of  solution;3 
but  in  practice  nobody  is  likely  to  complain 
because  the  return  is  made  to  the  collector  of  a 
wrong  district. 

§  90.  Control  of  Commissioner  of  Internal 
Revenue  over.  —  The  return  must  be  "  in  such  form 
as  the  Commissioner  of  Internal  Revenue,  with 
the  approval  of  the  Secretary  of  the  Treasury, 
shall  prescribe."  *  This  is  the  only  power  vested 
in  the  Commissioner  of  Internal  Revenue  or  in 
the  Secretary  of  the  Treasury  in  connection  with 
the  original  preparation  of  the  return.  It  is  im- 
portant to  emphasize  the  fact  that  the  power  does 
not  extend  to  any  direction  as  to  the  substance 

1  Act,  Par.  3,  lines  21-25  (infra  Appx.  I). 

2  Act,  Par.  3,  lines  25-30  (infra  Appx.  I). 

3  Cf.  1  Machen,  Mod.  Law  of  Corps.  §  114. 

4  Act,  Par.  3,  lines  30-33  (infra  Appx.  I). 


108      FEDERAL  CORPORATION  TAX  LAW. 

of  the  return  or  its  contents,  but  is  strictly  con- 
fined to  form.1  The  Commissioner  may  require 
the  return  to  be  on  paper  of  a  certain  size  or 
quality,  to  be  printed  or  typewritten,  to  be  in 
numbered  paragraphs,  or  to  be  upon  blank  forms 
to  be  supplied  by  the  Treasury  Department.  All 
such  matters  are  within  his  power.2  But  he  has 
no  authority  to  order  the  return  to  set  out  any 
matter  not  required  by  the  Act  of  Congress  to 
be  stated  therein.  He  cannot  lawfully  require 
any  more  detailed  information  than  the  legislature 
has  commanded  the  company  to  furnish  him.3 

1  Under   some   other  statutes,  the  Commissioner  is    au- 
thorized to  prescribe  the  contents  as  well  as  the  form  of  the 
returns:   United  States  v.  Lamson,  165  Fed.  80. 

2  Power  to  prescribe   "  form "   of  administration   bonds 
includes  power  to  require  from  co-executors  either  a  joint 
bond  or  several  bonds.    Chamberlain  v.  Anthony,  21  R.  I. 
331. 

3Cf.  Morrill  v.  Jones,  106  U.  S.  466;  1  Sup.  Ct.  Rep.  423 
("  The  Secretary  of  the  Treasury  cannot  by  his  regulations 
alter  or  amend  a  revenue  law");  United  States  v.  Two 
Hundred  Barrels  of  Whiskey,  95  U.  S.  571;  Spreckels  Sugar 
Ref.  Co.  v.  McClain,  113  Fed.  244;  51  C.  C.  A.  201  (re- 
versed on  other  points,  192  U.  S.  397;  24  Sup.  Ct.  Rep. 
376);  United  States  v.  Lamson,  165  Fed.  80  (doubting 
whether  under  a  statute  providing  that  dealers  in  oleo- 
margarine shall  keep  such  books  and  render  such  returns 
in  relation  thereto  as  the  Commissioner  may  prescribe, 
he  may  require  the  return  to  be  under  oath);  United 
States  v.  Eaton,  144  U.  S.  677  (holding  that  a  person  who 
fails  to  comply  with  a  treasury  regulation  is  not  punishable 
criminally  under  a  statute  for  omitting  to  do  anything  "  re- 


THE  EETUBK.  109 

§  91.  What  the  Return  Should  Contain  — 
Amount  of  Capital  Stock.  —  We  proceed,  therefore, 
to  an  examination  of  the  statutory  provisions  as 
to  what  the  return  must  state.  Except  where  a 
difference  is  specially  noted,  the  requirements 
for  returns  by  foreign  companies  are  the  same  as 
those  for  domestic  companies. 

In  the  first  place,  it  must  state  "  the  total 
amount  of  the  paid-up  capital  stock  "  of  the  com- 
pany "  outstanding  at  the  close  of  the  year."  * 
The  meaning  of  the  same  words  in  a  similar  con- 
nection in  the  Second  Paragraph  have  been  fully 
considered  above,2  and  it  is  sufficient  to  refer  to 
that  discussion  without  repeating  what  was  there 
said.  This  requirement  cannot  be  applied  to 
mutual  insurance  companies;  for  although  they 
are  subject  to  the  tax,  yet  they  have  no  capital 
stock,  so  that  it  must  be  sufficient  to  state  that 
fact.3 

quired  by  law  "  to  be  done,  even  if  the  regulation  is  author- 
ized by  law);  United  States  v.  Hyams,  146  Fed.  15. 

But  see  Powell  v.  United  States,  135  Fed.  881  (regulations 
of  Commissioner  as  to  rebate  of  taxes  on  manufactured 
tobacco  held  not  void  as  unreasonable);  Thacher  v.  United 
States,  15  Blatch.  15  (regulation  of  Commissioner  held  valid 
under  Rev.  Stats.  §321,  and  §3249);  United  States  v. 
Lamson,  173  Fed.  673  (regulations  of  Commissioner  as  to 
keeping  books  and  making  returns  of  oleomargarine,  re- 
quiring names  and  addresses  of  purchasers,  held  not  un- 
reasonable under  the  broad  terms  of  the  Oleomargarine  Act). 

1  Act,  Par.  3,  lines  33-37  (infra  Appendix  I). 

2  Supra    §61- §63. 
3Cf.  supra  §64. 


110      FEDERAL  CORPORATION  TAX  LAW. 

§  92.  Amount  of  Indebtedness.  —  Secondly,  the 
return  must  state  "  the  total  amount  of  the  bonded 
and  other  indebtedness  "  of  the  company  "  at  the 
close  of  the  year/'  r  What  is  meant  by  "other 
indebtedness  "  has  been  explained  above.2 

§  93.  Gross  Income.  —  Thirdly,  if  the  company 
be  a  domestic  company,  it  is  required  to  set  out 
in  the  return  "  the  gross  amount  of  its  income 
received  during  such  year  from  all  sources."  3 
A  foreign  company  is  required  to  state  the  "  gross 
amount  of  its  income  received  within  the  year 
from  business  transacted  and  capital  invested 
within  the  United  States";4  but  is  also  like 
domestic  companies  required  to  state  the  amount 
of  its  gross  income  derived  from  all  sources,  for 
that  amount  may  be  material  in  estimating  the 
amount  of  deduction  to  which  it  is  entitled  for 
interest  paid  during  the  year  on  its  indebtedness.5 

§  94.  Dividends  Received  from  Other  Com- 
panies. —  The  return  must  also  state,  in  the  case 
of  either  a  domestic  or  a  foreign  company,  the 
amount  received  within  the  year  by  way  of  divi- 
dends upon  stock  of  other  companies  subject  to 
the  tax.6  The  Paragraph  relating  to  the  return 
groups  the  statement  of  the  amount  of  such 

1  Act,  Par.  3,  lines  37-40  (infra  Appx.  I). 

2  Supra  §  60. 

3  Act,  Par.  3,  lines  41-44  (infra  Appx.  I). 

4  Act,  Par.  3,  lines  44-50  (infra  Appx.  I). 

5  Supra  §  82. 

8  Act,  Par.  3,  lines  50-56  (infra  Appx.  I). 


THE  RETURN.  Ill 

dividends  with  the  statement  of  the  amount  of 
gross  income,  although  the  preceding  Paragraph 
of  the  Act  classes  such  dividends  as  the  fifth  class 
of  deductions.  At  any  rate,  the  question  what 
the  company  is  entitled  to  treat  as  included  within 
such  dividends  is  discussed  above.1 

§  95.  Amount  Claimed  as  Deductions  —  In 
General.  —  The  Act  further  requires  that  the 
return  shall  state  the  amount  claimed  as  deduc- 
tions under  the  several  heads  mentioned  in  the 
Second  Paragraph  of  the  Act,  which  are  repeated 
almost  verbatim  in  this  Third  Paragraph.2  They 
fall  under  four  heads. 

§  96.  (1)  "  The  Total  Amount  of  all  the  Ordi- 
nary and  Necessary  Expenses  Actually  Paid  Out  of 
Earnings  in  the  Maintenance  and  Operation  of  the 
Business  and  Properties  of  Such  Corporation,  Joint 
Stock  Company  or  Association,  or  Insurance  Com- 
pany within  the  Year,  Stating  Separately  all 
Charges  Such  as  Rentals  or  Franchise  Payments 
Required  to  be  made  as  a  Condition  to  the  Con- 
tinued Use  or  Possession  of  Property,  and  if  Organ- 
ized under  the  Laws  of  a  Foreign  Country  the 
Amount  so  Paid  in  the  Maintenance  and  Operation 
of  its  Business  within  the  United  States  and  its 
Territories,  Alaska  and  the  District  of  Columbia."  3 
—  For  an  explanation  of  the  items  which  the 
company  may  properly  claim  as  deductions  under 

1  Supra    §71-§74. 

2  Act,  Par.  3,  lines  56-123  (infra  Appx.  I). 

3  Act,  Par.  3,  lines  56-70. 


112      FEDERAL  CORPORATION  TAX  LAW. 

this  head,  reference  is  made  to  the  exposition  of 
the  corresponding  clauses  in  the  preceding  para- 
graph of  the  Act.1 

The  words  "  within  the  year  "  are  transposed 
in  this  clause;  and  if  it  stood  alone,  they  might 
perhaps  be  read  in  connection  with  "  operation  " 
and  "  maintenance,"  so  as  to  require  the  com- 
pany to  state  the  amounts  paid  for  operating  the 
business  during  the  year,  instead  of  the  amounts 
paid  within  the  year  for  expenses  of  operation  or 
maintenance  though  incurred  at  some  previous 
time.  But  in  the  corresponding  clauses  in  the 
Second  Paragraph  the  words  "  within  the  year  " 
follow  immediately  after  "  paid,"  2  so  that  the 
latter  construction  is,  as  above  stated,  demon- 
strated to  be  correct.3 

As  to  foreign  companies  the  Paragraph  omits, 
probably  through  inadvertence,  the  word  "  prop- 
erty/' so  that  a  foreign  company  is  not  required  to 
state  the  amount  expended  in  maintenance  of  its 
property,  or  capital  invested,  within  the  United 
States,  but  merely  the  amount  expended  for  the 
maintenance  of  its  business.  But  since,  under  the 
Second  Paragraph,  a  foreign  company  is  expressly 
declared  to  be  entitled  to  deduct  from  its  gross 
income  the  amount  expended  for  the  maintenance 
of  its  American  property  or  investments  as  well 


1  Supra    §46-§52. 

2  Act,  Par.  2,  lines  6-9  (infra  Appx.  I). 

3  See  supra  §47. 


THE   RETURN.  113 

as  for  the  maintenance  of  its  American  business,1 
every  foreign  corporation  subject  to  the  Act  will 
be  inclined  to  make  the  statement  voluntarily 
so  as  to  get  the  benefit  of  the  larger  deduction. 

According  to  the  letter  of  the  statute,  foreign 
companies  are  required  to  state  both  the  amount 
expended  for  maintenance  of  their  business  in 
this  country  and  the  total  amount  expended  for 
maintenance  both  at  home  and  abroad.  The 
latter  amount  is  irrelevant,  and  there  is  no  reason 
for  requiring  a  foreign  corporation  to  set  it  out 
in  its  return.  To  do  so  would  be  to  impose  a 
a  quite  gratuitous  burden. 

§  97.  (2)  "  The  Total  Amount  of  all  Losses 
Actually  Sustained  during  the  Year  and  not  Com- 
pensated by  Insurance  or  Otherwise,  Stating  Sepa- 
rately, any  Amounts  Allowed  for  Depreciation  of 
Property,  and  in  the  case  of  Insurance  Companies 
the  Sums  other  than  Dividends,  paid  within  the 
Year  on  Policy  and  Annuity  Contracts  and  the  Net 
Addition,  if  any,  Required  by  Law  to  be  made 
within  the  Year  to  Reserve  Funds ;  and  in  the  Case 
of  a  Corporation,  Joint  Stock  Company  or  Associa- 
tion, or  Insurance  Company,  Organized  under  the 
Laws  of  a  Foreign  Country,  all  Losses  Actually 
Sustained  by  it  during  the  Year  in  Business  Con- 
ducted by  it  within  the  United  States  or  its  Terri- 
tories, Alaska,  and  the  District  of  Columbia,  not 
Compensated  by  Insurance  or  Otherwise,  Stating 

1  Act,  Par.  2,  lines  50-55  (infra  Appx.  I).  See  also  supra 
§80. 


114      FEDERAL  CORPORATION  TAX  LAW. 

Separately  any  Amounts  Allowed  for  Depreciation 
of  Property,  and  in  the  Case  of  Insurance  Com- 
panies the  Sums  other  than  Dividends,  Paid  within 
the  Year  on  Policy  and  Annuity  Contracts  and  the 
Net  Addition,  if  any,  Required  by  Law  to  be  made 
within  the  Year  to  Reserve  Fund."  l  —  For  a 
statement  of  the  various  items  which  a  corporation 
may  justly  claim  as  deductions  under  this  head 
reference  is  made  to  the  explanation  of  the  parallel 
clauses  in  the  Second  Paragraph  of  the  Act.2 

It  is  to  be  observed  that  the  return  must  state 
separately  the  amounts  claimed  as  an  allowance 
on  account  of  depreciation  of  property,3  and  the 
amounts  of  the  special  allowances  to  insurance 
companies.4 

The  letter  of  the  clause  would  require  foreign 
companies  to  state  the  total  amount  of  their  losses 
both  within  and  without  the  United  States;  but 
as  losses  occurring  in  business  transacted  outside 
the  United  States  are  irrelevant,  the  officials 
charged  with  the  administration  of  the  law  will 
hardly  exact  literal  compliance  with  this  provision 
by  foreign  companies. 

§  98.  (3)  "  The  Amount  of  Interest  Actually 
Paid  within  the  Year  on  its  Bonded  or  Other  In- 
debtedness not  Exceeding  the  Paid-up  Capital  Stock 

1  Act,  Par.  3,  lines  70-93. 

2  Supra   §  53- §  59,  as  to  domestic  companies,  and   §  81 
as  to  foreign  companies. 

3  As  to  which,  see  supra  §  57. 

4  As  to  which  see  supra  §  58- §  59. 


THE  RETURN".  115 

of  such  Corporation,  Joint  Stock  Company  or 
Association,  or  Insurance  Company,  Outstanding 
at  the  Close  of  the  Year,  and  in  the  Case  of  a  Bank, 
Banking  Association,  or  Trust  Company,  Stating 
Separately  all  Interest  Paid  by  it  within  the  Year 
on  Deposits ;  or  in  the  Case  of  a  Corporation,  Joint 
Stock  Company  or  Association,  or  Insurance  Com- 
pany, Organized  under  the  Laws  of  a  Foreign 
Country,  Interest  so  Paid  on  its  Bonded  or  other 
Indebtedness  to  an  Amount  of  such  Bonded  and 
other  Indebtedness  not  Exceeding  the  Proportion 
of  its  Paid-up  Capital  Stock  Outstanding  at  the 
Close  of  the  Year,  which  the  Gross  Amount  of  its 
Income  for  the  Year  from  Business  Transacted 
and  Capital  Invested  within  the  United  States  and 
any  of  its  Territories,  Alaska,  and  the  District  of 
Columbia,  Bears  to  the  Gross  Amount  of  its  Income 
Derived  from  all  Sources  within  and  without  the 
United  States."  l  —  The  various  items  justly  claim- 
able as  deductions  under  this  head  have  been  fully 
explained  above.2 

It  should  be  noted  that  banks  and  trust  com- 
panies must  state  separately 3  the  amount  of 
interest  paid  within  the  year  on  deposits.  Note 
also  that  the  expression  is  "  interest  paid  by  it 
within  the  year  on  deposits  "  *  and  not  "  interest 

1  Act,  Par.  3,  lines  93-117  (infra  Appx.  I). 

2  Supra  §  60- §67,  as  to  domestic  companies,  and  §  82,  as  to 
foreign  companies. 

3  Act,  Par.  3,  lines  101-103  (infra  Appx.  I). 

4  Act,  Par.  3,  lines  102-103  (infra  Appx.  I). 


116  FEDERAL  COLORATION  TAX  LAW. 

actually  paid  by  it  within  the  year  "  as  in  the 
corresponding  clause  in  Paragraph  Two.1 

§99.  (4)  "The  Amount  Paid  by  it"  — i.e. 
the  company  making  the  return  —  "  Within  the 
Year  for  Taxes  Imposed  under  the  Authority  of 
the  United  States  or  any  State  or  Territory  Thereof, 
and  Separately  the  Amount  so  Paid  by  it  for  Taxes 
Imposed  by  the  Government  of  any  Foreign  Country 
as  a  Condition  to  Carrying  on  Business  Therein."  2 
—  The  items  which  may  be  legally  included  under 
this  head  are  set  forth  above.3 

It  should  be  noted  that  foreign  taxes  must  be 
stated  separately.  This  is  very  necessary  because 
although  the  Act,  literally  construed,  requires 
foreign  companies  as  well  as  domestic  companies 
to  state  the  amount  of  taxes  paid  by  them  to 
foreign  governments  as  a  condition  to  carrying  on 
business  in  their  territories,  yet  amounts  paid  for 
such  taxes  can  be  deducted  from  the  gross  income 
only  in  the  case  of  domestic  companies. 

§  99A.  Net  Income.  —  Finally,  the  return  must 
state  "  the  net  income  of  such  corporation,  joint 
stock  company  or  association,  or  insurance  com- 
pany, after  making  the  deductions  in  this  section 
authorized."  *  Observe  that  the  amount  to  be 

1  Act,  Par.  2,  lines  29-30.    See  supra  §  67,  and  compare 
§49. 

2  Act,  Par.  3,  lines  117-123  (infra  Appx.  I). 

3  Supra   §68- §70,  as  to  domestic  companies,  and   §83, 
as  to  foreign  companies. 

4  Act,  Par.  3,  lines  123-127  (infra  Appx.  I). 


THE  RETlTRff.  117 

stated  is  the  net  income  after  making  the  deduc- 
tions authorized,  not  simply  in  the  Third  Para- 
graph, but  anywhere  in  the  Section  or  in  other 
words  anywhere  in  the  law  which  imposes  this 
tax;  for  the  whole  of  that  law  is  comprised  in 
Section  38  of  Chapter  6  of  the  Acts  of  the  Sixty- 
first  Congress,  1st  Session.1  Consequently,  there 
is  nothing  in  this  provision  to  prove  that  the  only 
deductions  allowable  to  be  made  from  the  gross 
income  are  those  specifically  directed  in  the  sec- 
ond and  third  paragraphs  of  the  Thirty-eighth 
section. 

§  100.  Additional  Matters  not  Required  by  the 
Act  to  be  Stated.  —  The  company  may  in  its  return 
voluntarily  state  additional  facts  over  and  above 
those  required  by  law  to  be  stated.  This  may  often 
be  quite  proper,  in  order  to  explain  the  return. 
At  all  events,  a  return  cannot  be  deemed  faulty 
because  it  may  state  more  than  is  required.  At 
the  worst,  the  additional  matter  may  be  rejected 
as  surplusage. 

But  as  indicated  above,  neither  the  Commissioner 
of  Internal  Revenue  nor  the  Secretary  of  the 
Treasury  has  any  power  to  compela  company  to 
state  in  its  return  anything  over  and  above  what 
is  required  by  Congress.  Nevertheless,  the  pub- 
lished Regulations  of  the  Commissioner  undertake 
to  require  the  various  corporations  to  submit  with 
their  returns  a  supplemental  statement  or  inventory 
of  materials,  supplies  and  merchandise  on  hand  for 

1  Supra  §2. 


118      FEDERAL  CORPORATION  TAX  LAW. 

sale  or  use  at  the  beginning  of  the  year.1  Yet  it 
is  submitted  that  this  order  is  clearly  ultra  vires. 
No  authority  to  make  any  such  requirement  is 
conferred  upon  the  Commissioner  either  by  this  Act 
or  by  any  other  Act  of  Congress;  but  on  the  con- 
trary this  statute  by  prescribing  in  detail  pre- 
cisely what  the  company  shall  be  obliged  to  state 
in  the  return  necessarily  implies  that  it  shall  not 
be  required  to  state  anything  further.  The  power 
of  the  Commissioner  is  merely  to  prescribe  the 
form  of  the  return.2 

The  Commissioner  has  no  authority  to  compel 
the  company  to  disclose  how  it  arrives  at  the 
results  stated  in  the  return.  Its  full  duty  is  done 
when  its  officers  make  the  statutory  declaration 
under  the  penalty  of  perjury  and  the  additional 
penalties  imposed  by  this  statute  in  case  of  a  false 
and  fraudulent  return. 

§  101.  Duty  of  Company  where  an  Accurate 
Return  is  Impossible.  —  It  may  often  happen  that 
a  corporation  is  unable  to  ascertain  accurately, 
either  on  account  of  the  manner  in  which  its  books 
are  kept  or  from  some  other  cause,  the  matters 
which  the  Statute  requires  to  be  set  out  in  the 
return.  In  such  circumstances,  the  company  must 
answer  the  statutory  interrogatories  as  best  it 
may.  If  it  is  honestly  unable  to  ascertain  accu- 
rately the  data  which  the  Statute  compels  to  be 

1  U.   S.  Int.  Rev.  Regs.,  No.  31,  Dec.   3d,  1909,  Art.  5 
(infra  Appx.  II). 

2  See  supra  §90. 


THE   RETURN".  119 

disclosed,  it  is  entitled  to  make  a  bona  fide  guess. 
Needless  to  say,  there  is  little  danger  that  any  such 
guess  will  err  on  the  side  of  unfairness  to  the 
company.  To  be  sure,  the  Act  provides  that  each 
company  shall  make  "  a  true  and  accurate  re- 
turn. "  *  But  this  can  only  mean  a  return  as 
accurate  as  possible  from  the  information  in  the 
company's  possession. 

Not  only  is  this  true  as  to  past  transactions; 
but  even  for  the  future  the  corporations  are  under 
no  obligation  to  change  their  method  of  book- 
keeping so  that  the  taxable  net  income  may  be 
more  easily  and  accurately  ascertained.2  The 
Income  Tax  Law  of  1894  did  contain  a  direction 
that  every  company  doing  business  for  profit  should 
"  keep  full  regular  and  accurate  books  of  ac- 
count; "  3  but  no  such  provision  is  contained  in 


1  Act,  Par.  3,  lines  14-15  (infra  Appx.  I). 

2  Of  course,   a  company  which  fails  to   keep  its  books 
so  as  accurately  to  show  the  amount  of  net  income  cal- 
culated in  the  statutory  mode  takes  the  risk  of  being  com- 
pelled to  pay  an  excessive  amount,  if  proceedings  to  examine 
its  books  are  instituted  and  if  the  Commissioner  of  Internal 
Revenue  finds  himself  obliged  to  guess  or  estimate  the  com- 
pany's net  income.    His  guess  is  not  so  likely  to  be  favorable 
to  the  company  as  the  guess  of  its  own  officers.    An  assess- 
ment based  on  a  mere  estimate  would  be  lawful:    United 
States  v.  U.  S.  Fidelity  &  Guaranty  Co.,  144  Fed.  866,  re- 
versed on  another  point,  158  Fed.  604. 

3  Act,  Aug.  27,  1894,  c.  349,  §36;    2  U.  S.  Comp.  Stats. 
2267.     A  similar  requirement  is  imposed  upon  dealers  in 
oleomargarine  by  the  oleomargarine-tax  laws.    See  Act,  May 


120      FEDERAL  CORPORATION"  TAX  LAW. 

the  present  law,  and  the  power  to  enact  it  is 
vested  in  Congress  and  not  in  the  Commissioner. 1 
Nevertheless,  that  official  appears  to  be  of  a  con- 
trary opinion;  for  he  has  promulgated  a  regula- 
tion that  "  the  business  transacted  by  corpora- 
tions, joint  stock  companies,  associations  or 
insurance  companies  must  be  so  recorded  that 
each  and  every  item  therein  set  forth  may  be 
readily  verified  by  an  examination  of  the  books 
and  accounts,  where  such  an  examination  is 
deemed  necessary/'  2  although  he  also  announces 
that  "  no  particular  system  of  bookkeeping  or 
accounting  will  be  required  by  the  Department."  3 
§  102.  Disposition  of  the  Return.  —  The  Act 
provides  that  the  collector,  immediately  after 
receiving  a  return,  shall  transmit  it  to  the  Com- 
missioner of  Internal  Revenue,4  in  whose  office 
the  same  shall  be  permanently  kept.5 

9,  1902,  c.  784,  §  6  (U.  S.  Comp.  Stats.,  1909,  p.  868),  con- 
strued in  United  States  v.  Lamson,  173  Fed.  673. 

1  Cf .  supra  §  90.  But  see  United  States  v.  Eaton,  144 
U.  S.  677  (leaving  undecided  the  question  whether  a  regu- 
lation requiring  dealers  in  oleomargarine  to  keep  books,  and 
make  a  monthly  return  was  authorized  under  a  provision 
empowering  the  Commissioner  of  Internal  Revenue  with  the 
approval  of  the  Secretary  of  the  Treasury  to  make  "  all 
needful  regulations  for  carrying  into  effect  a  law  taxing 
oleomargarine). 

3U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  3d,  1909,  Art.  6 
(infra  Appx.  II). 

3  Ibid. 

4  Act,  Par.  3,  lines  127-129  (infra  Appx.  I). 

5  Act,  Par.  6  (infra  Appx.  I).    See  infra  §  116. 


THE  KETtJEtf.  121 

§  103.  Effect  of  the  Return.  —  Unless  the  re- 
turn shall  be  corrected  in  the  mode  provided  in 
the  Act  and  hereinafter  explained,  it  stands  as 
correct  and  unimpeachable.  The  Statute  enacts 
that  "  All  returns  shall  be  retained  by  the  Com- 
missioner of  Internal  Revenue,  who  shall  make 
assessments  thereon.11  l  The  assessment  shall  be 
made  thereon  —  that  is,  on  the  facts  as  stated  in 
the  return.  The  duty  of  the  Commissioner  in 
this  regard  is  little  if  anything  more  than  minis- 
terial. He  is  merely  to  see  that  the  process  of 
subtracting  the  various  items  of  deduction  from 
the  gross  income  as  set  out  in  the  return  is  cor- 
rectly performed,2  and  to  make  an  assessment 
of  one  per  cent  of  the  balance.3 

§  104.  Failure  to  make  Return.  —  The  failure 
to  make  a  return  within  the  time  limited  in  the 
Act 4  renders  the  corporation  liable  to  a  fine  of 
not  less  than  one  thousand  dollars  and  not  more 
than  ten  thousand  dollars.5  In  case  of  the  failure 
of  any  company  to  make  a  return  as  required  by 
law,  it  is  the  duty  of  the  collector  to  report  that 
fact  to  the  Commissioner  of  Internal  Revenue 
who  shall  thereupon  require  such  information 
from  the  company  as  he  may  deem  expedient  and 
may  specially  designate  one  of  the  government 

1  Act,  Par.  5,  lines  1-3  (infra  Appx.  I). 

2  See  infra  §  120. 

3  See  infra  §  121,  §  134. 

4  As  to  what  the  time  so  limited  is,  see  supra  §  86. 

5  Act,  Par.  8,  lines  1-5  (infra  Appx.  I). 


122      FEDERAL  CORPORATION  TAX  LAW. 

officers  or  employees  known  as  revenue  agents  * 
to  investigate  the  matter.2  Thenceforth  the  pro- 
ceedings do  not  differ  from  the  proceedings,  which 
are  fully  explained  below,  for  the  correction  of  a 
defective  return.  In  brief,  upon  the  evidence 
reported  by  the  revenue  agent,  the  Commissioner 
is  himself  to  prepare  a  return  on  behalf  of  the 
delinquent  company.3  The  return  so  prepared 
is  to  have  the  same  effect  as  a  return  duly  made 
by  the  company  would  have  done,  and  upon  the 
return  so  prepared  the  assessment  is  to  be  made. 
§  105.  Returns  Incomplete  on  Their  Face.  - 
It  would  seem,  although  the  statute  does  not  so 
declare  in  words,  that  a  return  which  on  its  face 
fails  to  comply  with  law  —  that  is  to  say,  omits 
some  of  the  information  required  by  law  to  be 
given  —  may  be  rejected  by  the  collector,  and 
regarded  as  no  return  at  all,  at  least  as  to  the 
omitted  matters.4  He  may,  accordingly,  report 
that  no  return  has  been  made,  and  the  Com- 
missioner may  thereupon  institute  the  proceedings 
above  referred  to  for  supplying  the  return.  A 

1  As  to  whom,  see  Rev.  Stats.  §  3152,  amended  by  Act 
March  1st,  1879,  c.  125,  §  2  (U.  S.  Comp.  Stats,  p.  2047). 

2  Act,  Par.  4,  lines  7-39  (infra  Appx.  I). 

3  Act,  Par.  4,  lines  40-43  (infra  Appx.  I). 

4Cf.  Attorney-General  v.  Till  (Ho.  of  Lds.),  54  Sol.  J. 
132,  reversing  (1909)  1  K.  B.  694  (where  it  had  been  held 
that  a  statute  which  imposed  a  penalty  upon  any  person  who 
refuses  or  neglects  to  deliver  a  "  statement  as  aforesaid  "  of 
his  income  does  not  apply  to  a  person  who  mistakenly  makes 
an  erroneous  return). 


THE  RETURN*.  123 

return  which  is  incomplete  on  its  face  differs 
from  a  return  which,  though  fair  on  its  face,  is 
false  or  incorrect  in  some  particulars. 

§  106.  Correcting  the  Return  —  Preliminary 
Proceeding  before  Commissioner.  —  As  stated 
above,  a  return  which  on  its  face  complies  with 
law  is  presumed  to  be  correct  until  impeached  in 
the  mode  provided  by  the  Act.  The  first  step 
in  the  statutory  proceeding  to  impeach  its  cor- 
rectness is  to  satisfy  the  Commissioner  of  Internal 
Revenue  that  the  return  is  false.  "  Whenever/' 
says  the  Act,  "  evidence  shall  be  produced  before 
the  Commissioner  of  Internal  Revenue  which  in 
the  opinion  of  the  Commissioner  justifies  the  belief 
that  the  return  made  by  any  corporation,  joint 
stock  company  or  association,  or  insurance  com- 
pany, is  incorrect/'  1  the  Commissioner  may  pro- 
ceed to  correct  the  return  in  a  manner  specified 
in  the  Act.  The  statute  is  silent  as  to  how  or  by 
whom  this  evidence  that  the  return  is  incorrect 
is  to  be  adduced.  There  is  no  provision  for  notice 
to  the  company;  and  doubtless  this  preliminary 
proceeding  is  intended  to  be  purely  ex  parte. 
There  is  no  provision  for  compelling  the  attend- 
ance of  witnesses.  The  "  evidence  "  referred  to 
must,  therefore,  be  produced  voluntarily.  Doubt- 
less any  patriotic,  not  to  say  officious,  citizen 
might  testify  to  the  Commissioner  that  a  return 
is  false.  The  President,  or  any  officer  of  the 
government,  might  very  properly  lay  before  the 

1  Act,  Par.  4,  lines  1-7  (infra  Appx.  I). 


124       FEDERAL  CORPORATION  TAX  LAW. 

Commissioner  any  facts  tending  to  show  the  in- 
correctness of  a  return.  It  is  expressly  made  the 
duty  of  the  several  collectors,  in  the  general 
statute  denning  their  duties,  to  report  any  such 
facts  which  they  may  happen  to  learn.  * 

In  passing  upon  the  sufficiency  of  any  evidence 
adduced  for  this  purpose,  the  Commissioner  is  exer- 
cising a  quasi-judicial  function  and  is  not  acting 
in  a  ministerial  capacity  as  in  making  up  the  as- 
sessment on  the  returns.2  No  court,  therefore, 
would  undertake  to  control  his  discretion  in  de- 
termining the  evidence  to  be  either  sufficient  or 
insufficient.  But  some  evidence  tending  to  show 
the  return  to  be  incorrect  there  must  be,  or  else 
the  Commissioner  has  no  jurisdiction  to  proceed 
further  for  the  correction  of  a  return  which  is  fair 
on  its  face.  It  is  not  necessary  to  assert  that  the 
Commissioner  is  bound  by  all  the  technical  rules 
of  evidence  applicable  to  trials  at  nisi  prius;  but 
there  must  be  some  facts  shown  sufficient  to  justify 
a  rational  man  in  believing  the  return  to  be  in- 
correct —  something  more  than  mere  suspicion. 

As  the  Commissioner  in  this  matter  acts  in  a 
quasi-judicial  capacity,  and  not  in  a  merely 
ministerial  capacity,  it  follows  that  he  cannot 
delegate  to  anybody  else  the  duty  of  passing  on 
the  evidence.  Until  he,  personally,  is  satisfied 
that  the  "  evidence  produced  "  before  him  justifies 

1  Rev.  Stats.  §  3163  (2  U.  S.  Comp.  Stats,  p.  2056);  Rev. 
Stats.  §  3172  (2  U.  S.  Comp.  Stats,  p.  2065). 

2  As  to  which,  see  supra  §  103  and  infra  §  120. 


THE  RETURN.  125 

the  belief  that  a  return  is  incorrect,  he  has  no 
jurisdiction  to  take  any  further  steps  for  its  cor- 
rection. l 

The  Commissioner  seems  to  have  overlooked  the 
necessity  for  some  ex  parte  but  quasi-judicial 
proceedings  before  instituting  any  proceedings 
for  correction  of  the  return;  for  his  published 
regulations  intimate  that,  on  the  mere  request  of 
a  collector,  a  revenue  agent  will  be  specially 
designated  to  collect  data  in  order  to  determine 
the  amount  of  tax  to  be  assessed.2 

§  107.  Further  Proceedings  —  Requiring  Addi- 
tional Information  from  the  Company.  —  Whenever 
the  Commissioner  decides  that  the  evidence  pre- 
sented to  him  justifies  the  belief  that  the  return  is 
incorrect,  the  Act  then  provides  that  he  "  may 
require  from  the  corporation,  joint  stock  company 
or  association,  or  insurance  company,  making 
such  return,  such  further  information  with  refer- 
ence to  its  capital,  income,  losses,  and  expenditures 
as  he  may  deem  expedient."  3  Probably  "  may  " 
in  this  clause  should  be  construed  as  "  shall"; 
for  this  provision  is  the  only  one  that  implies  any 
notice  to  the  company  of  the  proceeding  for 
correction  of  the  return,  and  yet  unless  such 
notice  is  required,  the  Act  would  seem  to  be 

1  As  to  possible  remedies   in   case  he  should  undertake 
to  do  so,  see  infra  §  110,  §  134,  §  137. 

2  U.  S.  Int.  Rev.  Regs.,  No.  31,  Dec.  9th,  1909,  Art.  7 
(infra  Appx.  II). 

3  Act,  Par.  4,  lines  11-17  (infra  Appx.  I). 


126      FEDERAL  CORPORATION  TAX  LAW. 

unconstitutional.1  It  is  true,  however,  that  the 
only  persons  whose  testimony  the  revenue  agent 
deputed  by  the  Commissioner  is  authorized  to 
take  are  officers  and  employees  of  the  company, 
and  it  may  be  argued  that  notice  to  them,  which 
is  necessary  in  order  to  compel  their  attendance 
as  witnesses,  is  sufficient  notice  to  the  company  to 
save  the  constitutionality  of  the  Act.  But  this 
argument  is  more  specious  than  sound,  because 
the  company  is  entitled  to  a  hearing,  so  that 
notice  to  officers  and  employees  as  witnesses 
hardly  satisfies  the  constitutional  requirement  of 
notice  to  the  company  as  a  party  or  litigant. 

It  is  to  be  observed  that  here  for  the  first  time 
the  Act  enables  the  Commissioner  to  require  from 
the  company  such  information  as  he  may  deem 
expedient.  The  facts  which  each  company  is 
obliged  to  disclose  in  the  return  are  fixed  by  law, 
and  the  Commissioner  has  no  power  to  add  to 
them.  But  as  soon  as  the  Commissioner  is  satis- 
fied by  evidence  adduced  before  him  that  the 
return  is  incorrect,  then  he  may  require  from  the 
company  such  information  as  he  may  deem  ex- 
pedient. He  may,  so  to  speak,  cross-examine  the 
company. 

§  108.  Examination  of  Books  and  Taking  of 
Testimony.  —  In  addition  to  requiring  further 
or  more  detailed  information  from  the  company 

1  Palmer  v.  McMahon,  133  U.  S.  660,  669;  18  Sup.  Ct. 
Rep.  324;  Central  of  Ga.  Ry.  Co.  v.  Wright,  207  U.  S.  127; 
Londoner  v.  Denver,  210  U.  S.  373. 


THE  RETURN.  127 

itself,  the  Commissioner  of  Internal  Revenue,  after 
being  convinced  by  evidence  that  the  return  is 
incorrect,  may  specially  designate  one  of  the 
government  employees  known  as  revenue  agents 
to  examine  any  books  and  papers  bearing  upon 
the  matters  required  by  law  to  be  stated  in  the 
return,  and  to  take  the  testimony  of  officers  or 
employees  of  the  company  with  reference  to  those 
matters. l  It  is  not  expressly  stated  that  the 
testimony  shall  be  reduced  to  writing;  but  such 
is  a  fair  inference,  inasmuch  as  the  Commissioner 
must  act  upon  the  information  elicited.2 

It  is  only  officers  and  employees  of  the  company 
whose  testimony  may  be  taken.3  The  Act  confers 
no  authority  to  take  the  testimony  of  any  third 
person,  not  connected  with  the  company,  or  even 
of  a  private  shareholder  who  is  not  an  officer. 
Probably  the  words  "  officer  or  employee  "  would 
be  construed  as  including  former  officers  and  former 
employees.  It  is  not  expressly  stated  that  the 
books  and  papers  which  may  be  examined  shall 
be  confined  to  books  and  papers  of  the  company.4 
Yet  that  is  the  fair  inference,5  and  would  seem 
to  follow  a  fortiori  from  the  clause  which  authorises 
the  revenue  agent  to  compel  the  attendance  as 


1  Act,  Par.  4,  lines  22-34  (infra  Appx.  I). 

2  Act,  Par.  4,  lines  40-43  (infra  Appx.  I). 

3  Act,  Par.  4,  lines  28-31  (infra  Appx.  I). 

4  Act,  Par.  4,  lines  24-28  (infra  Appx.  I). 

5  Cf .  Re  Chadwick,  1  Lowell,  439. 


128      FEDERAL  CORPORATION  TAX  LAW. 

witnesses  of  officers  and  employees  but  not,  so 
far  as  is  stated,  of  any  other  persons. 

The  only  books  and  papers  which  the  revenue 
agent  may  examine  are  those  "  bearing  upon 
matters  required  to  be  included  in  the  return." 
He  must  show  that  a  book  or  document  contains 
relevant  matter  before  he  should  be  permitted  to 
examine  it.  He  is  not  authorised  to  go  through 
the  company's  books  and  papers  on  a  fishing 
expedition. 

§  109.  Court  Proceedings.  —  Although  the  rev- 
enue agent  specially  designated  for  the  purpose 
is  authorised  to  examine  the  company's  books  and 
to  require  the  attendance  of  its  officers  or  employees 
as  witnesses,  and  may  administer  oaths  to  them, 
yet  he  cannot  punish  them  if  they  refuse  to  attend 
as  witnesses,  or  to  permit  him  to  examine  the 
books.1  In  order  to  obviate  this  difficulty,  the 
Act  provides  that  "the  Commissioner  of  Internal 
Revenue  may  also  invoke  the  aid  of  any  court  of 
the  United  States  having  jurisdiction  to  require 
the  attendance  of  such  officers  or  employees 
and  the  production  of  such  books  and  papers. "  2 
Another  clause  of  the  Act  provides  that, 
"  Jurisdiction  is  hereby  conferred  upon  the  cir- 
cuit and  district  courts  of  the  United  States 

1  It  has  been  thought  that  it  would  be  unconstitutional 
to  punish  as  for  contempt  a  refusal  to  obey  an  order  of  an 
administrative  officer:    Re  Kinney,  102  Fed.  468  (headnote 
inadequate). 

2  Act,  Par.  4,  lines  35-39  (infra  Appx.  I). 


THE  RETURN.  129 

for  the  district  within  which  any  person  sum- 
moned under  this  section  to  appear  to  testify 
or  to  produce  books  as  aforesaid,  shall  reside, 
to  compel  such  attendance,  production  of  books 
and  testimony  by  appropriate  process/7  *  It 
is  to  be  observed  that  the  power  vested  in  the 
courts  is  not  a  power  to  punish  for  disobedience 
of  the  order  or  summons  of  an  administrative 
officer,  as  in  some  similar  cases  under  other 
statutes; 2  but  is  a  power  to  issue  the  order 
or  writ  and  to  punish  only  for  disobedience  of  the 
court's  order. 

Any  such  court  proceeding  should  doubtless  be 
begun  by  petition  in  the  name  of  the  Commissioner 
of  Internal  Revenue,  stating  the  facts  and  praying 
that  appropriate  process  be  issued.  Thereupon, 
a  summons  should  be  issued  for  the  officers  and 
employees  whom  it  is  desired  to  examine,  and  some 
writ,  or  order  of  court,  in  the  nature  of  a  subpoena 
duces  tecum,  should  be  granted,  directed  to  the 
officers  who  have  custody  and  control  of  the 
books  and  documents  which  it  is  desired  to  ex- 
amine. The  matter  will  be  governed  by  the  rules 
applicable  to  production  of  documents  as  evidence 
under  writs  in  the  nature  of  a  subpoena  duces 
tecum 3  rather  than  by  the  very  different  rules 

1  Act,  Par.  8,  lines  27-33  (infra  Appx.  I). 

2  Rev.    Stats.   §3175   (2  U.  S.  Comp.  Stats,   p.    2068), 
Quaere,  as  to  the  constitutionality  of  such  a  statute:    Re 
Kinney,  102  Fed.  468,  468-469. 

3  Cf.  2  Machen,  Mod.  Law  of  Corps.,  §  1092,  §  1093. 


130      FEDERAL  CORPORATION  TAX  LAW. 

applicable  to  the  inspection  of  books  by  share- 
holders in  the  exercise  of  a  quasi-proprietary 
right,1  or  the  somewhat  different  rules  applicable 
to  the  production  of  documents  by  way  of  dis- 
covery.2 Yet,  this  statutory  proceeding  does 
partake  somewhat  of  the  nature  of  a  proceeding 
for  discovery,  because  only  officers  and  employees 
of  the  company,  which  is  the  substantial  though 
not  the  nominal  defendant,  can  be  summoned  as 
witnesses.  The  distinction  between  production 
of  books  as  evidence  under  a  subpoena  duces 
tecum,  production  by  way  of  discovery,  and  pro- 
duction for  inspection  by  shareholders  or  other 
persons  haying  a  quasi-proprietary  right,  though 
often  overlooked,  is  fundamentally  important. 

§110.  Defences.  —  The  person  summoned, 
either  to  testify  or  to  produce  books  and  papers, 
may,  of  course,  be  heard  in  court  as  to  the  pro- 
priety of  the  order,  or  issuance  of  the  writ.3  If 
it  appears  that  he  is  not  an  officer  or  employee 
of  the  company,  the  court  under  this  statute  has 
no  jurisdiction  to  compel  him  to  testify  or  to  pro- 
duce books  or  papers,  and  upon  objection  he  must 
be  excused  from  testifying  or  producing  the  docu- 
ments; or  if  it  is  not  proved  or  admitted  that  the 
documents  in  question  are  relevant  to  the  matters 
required  to  be  stated  in  the  return,4  the  court 

1  Cf.  2  Machen,  Mod.  Law  of  Corps.,  §  1093. 

2  Cf.  2  Machen,  Mod.  Law  of  Corps.,  §  1091. 

3Cf.  Re  Kinney,  102  Fed.  468  (headnote  inadequate). 
4  Act,  Par.  4,  lines  24-26  (infra  Appx.  I). 


THE  RETURN".  131 

should  refuse  to  compel  their  production.  So, 
if  the  Commissioner  of  Internal  Revenue  has  pro- 
ceeded without  jurisdiction  —  for  example,  has 
ordered  the  institution  of  proceedings  for  correc- 
tion of  the  return  on  mere  suspicion  or  prejudice, 
and  without  any  evidence  of  its  incorrectness  — 
the  court  has  no  jurisdiction,  and  must  quash  all 
writs  or  orders  for  attendance  of  witnesses  or  pro- 
duction of  books  and  papers. 

§  111.  Costs.  —  The  Act  contains  no  provision 
requiring  the  company  to  pay  the  costs  of  pro- 
ceedings instituted  in  order  to  correct  a  return, 
or  to  supply  the  lack  of  a  return.  Perhaps  the 
only  way  the  Government  can  be  recouped  for 
these  expenses  is  by  collecting  the  fines  which  are 
imposed  by  the  Act  in  such  cases,1  and  by  the 
addition  which  is  required  to  be  made  to  the 
amount  of  the  assessment.2  It  would  seem  unjust 
that  costs  should  be  imposed  upon  the  officers  or 
employees  who  may  be  summoned  to  testify. 

§  112.  Decision  of  Commissioner  on  Evidence 
so  Acquired.  —  "  Upon  the  information  so  acquired 
the  Commissioner  of  Internal  Revenue  may  amend 
the  return  or  make  a  return  where  none  has  been 
made."  3  This  action  is  to  be  taken  by  the  Com- 
missioner on  the  "  information  so  acquired "  4 

1  See  supra  §  104,  and  infra  §  115. 

2  See  infra  §121. 

3  Act,  Par.  4,  lines  40-43  (infra  Appx.  I). 

4  Compare   the   provision   in   the   succeeding   paragraph 
that  the  Commissioner  shall  "  make  a  return  upon  informa- 


132  FEDERAL   CORPOKATIOtf   TAX  LAW. 

—  that  is,  acquired  from  the  company,  its  books, 
its  officers  and  its  employees;  and  he  has  no  right 
to  consider  evidence  of  any  other  person. 

Of  course,  the  company  has  a  right  to  be  heard 
upon  the  matter  and  present  its  own  side  of  the 
question.  There  is,  however,  no  machinery  pro- 
vided to  enable  the  company  to  compel  attendance 
of  witnesses  in  its  behalf.  Indeed,  there  is  no 
provision  for  notice  to  the  company,  unless,  as  sug- 
gested above,  "  may  "  be  construed  as  "  shall  "  ;  l 
but  notice  and  opportunity  to  be  heard  in  opposi- 
tion to  any  change  in  its  return  is  the  constitutional 
right  of  the  corporation  and  must,  if  necessary,  be 
read  into  the  law  in  order  to  save  its  validity. 

§  113.  Period  of  Limitations.  —  The  correction 
of  returns,  or  the  supplying  of  a  return  in  case 
of  a  neglect  to  make  a  return,  must  take  place 
"  within  three  years  after  said  return  is  due."  2 
It  should  be  observed  that  the  provision  is,  not 
that  proceedings  for  the  correction  of  a  false  return 
or  for  supplying  a  lacking  return  shall  be  instituted 
within  three  years,  but  that  they  shall  be  completed 
by  the  actual  making  of  the  corrected  return,  or 
substitute  return,  within  the  period  of  three  years. 
It  is,  therefore,  questionable  whether  this  pro- 
vision should  be  construed  as  directory  merely, 
or  should  operate  as  a  statute  of  limitations  so 

tion  obtained  as  above  provided  for."  Act,  Par.  5,  lines  38-39 
(infra  Appx.  I). 

1  Supra   §107. 

2  Act,  Par.  5>  lines  36-37  (infra  Appx.  I). 


THE  RETURN1.  133 

as  to  bar  the  institution  of  proceedings  for  this 
purpose  after  the  lapse  of  the  period,  and  to  cause 
the  abatement  of  any  proceedings  pending  at  the 
expiration  of  the  three  years.1 

Proceedings  for  correcting  or  supplying  a  return 
may  be  instituted,  it  seems,  at  any  time  within 
the  three  years,  upon  discovery  of  the  incorrect- 
ness of  a  return  or  of  the  lack  thereof,  even  after 
the  assessment  has  been  made  on  the  original 
return,  has  become  due,  and  has  even  actually 
been  paid.2 

§  114.  Correcting  Return  by  Action  of  Debt 
for  Tax  Due.  —  Under  some  statutes  which  like 
this  Act  of  Congress  fix  the  rate  of  tax  and  describe 
the  subject,  it  has  been  held  that  even  though  no 
return  or  assessment  has  been  made,  an  action  of 
debt  may  be  maintained  by  the  United  States  to 
recover  the  proper  amount  of  tax,  which  may  be 
ascertained  by  evidence.3  Under  such  statutes  it 

1  In  any  event,   the  limitation  would,  perhaps,  not  bar 
an  action  of  debt  to  recover  the  amount  due  in  excess  of 
the  assessment:    United  States  v.  Little  Miami  etc.  R.  R. 
Co.,  1  Fed.  700,  reversed  as  to  other  points,  sub  nom.  Little 
Miami  etc.  R.  R.  Co.  v.  United  States,  108  U.  S.  277.     See 
infra  §  114. 

2  This  is  the  necessary  force  of  the  words  "  at  any  time  " 
in  Act,  Par.  5,  line  36  (infra  Appx.  I).    But  an  assessment 
acquiesced  in  by  the  government  may  be  presumed  to  have 
been  correct:    United  States  v.  Philadelphia  etc.  R.  R.  Co., 
123  U.  S.  113;   8  Sup.  Ct.  Rep.  77. 

3  United  States  v.  Little    Miami    etc.  R.  R.  Co.,  1  Fed. 
700,  apparently  affirmed  as  to  this  point,  Little  Miami  etc. 
R.  R.  Co.  v.  United  States,  108  U.  S.  277,  280;   Dollar  Sav. 


134      FEDERAL  CORPORATION  TAX  LAW. 

has  also  been  held  that  an  erroneous  return  and 
assessment  thereof,  followed  by  payment  of  the 
amount  of  the  assessment,  are  no  bar  to  an  action 
of  debt  by  the  government  to  recover  the  excess 
claimed  to  have  been  due  over  and  above  the 
return  and  assessment.1  Perhaps,  these  cases 
would  be  applied  to  the  present  law.  On  the  other 
hand,  although  income  is  in  most  cases  repre- 
sented by  cash,  yet  there  may  be  cases  where  it 
comes  in  the  shape  of  property;  and  in  such  cases, 
there  must  be  a  valuation  before  tax  is  imposed. 
It  is,  therefore,  not  clear  whether  the  present  tax 
is  to  be  regarded  as  strictly  an  ad  valorem  tax, 
or  as  partaking  more  of  the  nature  of  a  specific 
duty. 

§  115.  Penalties  for  Erroneous  Returns.  —  Re- 
turns which  are  made  for  the  fraudulent  purpose 
of  cheating  the  government  constitute,  of  course, 
a  special  class  of  incorrect  returns.  Such  fraudulent 
returns  may  be  corrected  in  the  same  way  as 
other  erroneous  returns;  the  fact  that  a  return 

Bank  v.  United  States,  19  Wall.  227,  240;  King  v.  United 
States,  99  U.  S.  229;  Westhus  v.  Union  Trust  Co.,  164  Fed. 
795;  90  C.  C.  A.  441  (contra  to  United  States  v.  Marion 
Trust  Co.,  ubi  infra,  and  reviewing  previous  cases). 

But  cf.  United  States  v.  Marion  Trust  Co.,  143  Fed.  301 
(holding  that  an  ad  valorem  as  distinguished  from  a  specific 
tax  is  not  "  imposed  "  until  an  assessment),  affirmed  by  a 
divided  court,  205  U.  S.  539;  Farrell  v.  United  States,  167 
Fed.  639. 

United  States  v.  Little  Miami  etc.  R.  R.  Co.,  1  Fed. 
700,  reversed  on  another  point,  Little  Miami  etc.  R.  R.  Co. 
v.  United  States,  108  U.  S.  277. 


THE  RETURN".  135 

is  fraudulent  does  not  make  it  any  the  less  incor- 
rect. But  in  addition  to  subjecting  the  company 
to  an  inquisitorial  examination  of  its  books  and 
of  its  officers,  for  the  purpose  of  correcting  errors, 
a  return  which  is  fraudulent  as  well  as  false  subjects 
the  company  to  various  penalties.  In  the  first 
place,  as  more  fully  explained  below,  one  hundred 
per  cent  is  to  be  added  to  the  amount  of  the  tax.  * 
This  penalty  is  not  incurred  in  the  case  of  an  honest 
mistake  in  a  .return.  Secondly,  in  any  case  of  a 
return  which  is  either  false  in  fact  or  fraudulent 
in  purpose,  the  company  is  subjected  to  a  fine  of 
not  less  than  one  thousand  nor  more  than  ten 
thousand  dollars.2  It  would  seem  that  an  honestly 
mistaken  return  subjects  the  company  to  this 
penalty,  as  well  as  a  return  which  is  both  false  and 
fraudulent.3  The  language  of  the  statute  is  that 
any  company  shall  incur  the  penalty  which  shall 
render  a  "  false  or  fraudulent  return."  But  in 
any  case  of  a  bona  fide  mistake  the  government  is 
unlikely  to  attempt  to  procure  the  infliction  of  the 
fine.  If,  however,  criminal  proceedings  are  in- 
stituted for  that  purpose,  the  company's  bona 
fides  is  no  bar  to  a  conviction,  though  of  course  it 
may  be  considered  by  the  court  in  imposing  sen- 
tence. Thirdly,  any  person  authorised  by  law 
to  make  or  verify  any  return,  who  makes  any 
false  or  fraudulent  statement  therein,  "  with 

1  Infra  §  121. 

2  Act,  Par.  8,  lines  5-6  (infra  Appx.  I). 

3  Cf.  infra  §  121. 


136      FEDERAL  CORPORATION  TAX  LAW. 

intent  to  defeat  or  evade  the  assessment/'  is 
declared  guilty  of  a  misdemeanor,  punishable  by 
a  fine  of  not  more  than  one  thousand  dollars  or 
imprisonment  for  not  more  than  a  year,  or  both, 
in  the  discretion  of  the  court.1 

§  116.  Returns  as  Public  Records.  —  After  the 
assessment  shall  have  been  made,  the  returns, 
together  with  any  corrections  thereof  made  in 
the  manner  above  described,  are  to  be  filed  in  the 
office  of  the  Commissioner  of  Internal  Revenue 
as  public  records,  and  shall  be  open  to  inspection 
as  such.2 

§  117.  Protection  against  Disclosure  of  Secrets. 
—  Burdensome  and  unnecessary  as  the  provision 
throwing  open  to  public  inspection  the  returns  and 
corrections  thereof  may  be  thought  in  some 
quarters,  there  would  be  much  more  ground  for 
complaint  if  all  the  evidence  obtained  in  the  course 
of  a  proceeding  for  supplying  or  correcting  a 
return  were  given  to  the  public.  The  Act  provides, 
however,  under  penalty  of  fine  and  imprisonment 
that  no  "  collector,  deputy  collector,  agent,  clerk 
or  other  officer  or  employee  of  the  United  States  " 
shall  divulge,  in  any  manner  not  provided  by  law, 
any  information  obtained  by  him  in  the  discharge 
of  official  "duty,  or  any  document  received,  evi- 

1  Act,  Par.  8,  lines  11-20  (infra  Appx.  I). 

2  Act,  Par.  6  (infra  Appx.  I).    This  means  that  any  citizen 
shall  not  merely  have  the  right  to  examine  them  but  also  to 
make  copies  or  extracts:  Marsh  v.  Sanders,  110  La.  726;  34 
So.  752. 


THE  RETURN.  137 

dence  taken  or  report  made  under  this  section 
"  except  upon  the  special  direction  of  the  Presi- 
dent. "  l  The  general  words  "  other  officer  or 
employee  "  2  would  be  restrained  by  the  ejusdem 
generis  rule  of  construction  to  officers  and  em- 
ployees of  the  same  class  as  those  specially  enumer- 
ated, and  therefore  would  not  include  the  higher 
officials  of  the  Government  such  as  the  Secretary 
of  the  Treasury  and'  the  Commissioner  of  Internal 
Revenue.  The  authority  apparently  vested  in 
the  President  to  authorise  a  disclosure  of  the 
innermost  secrets  of  such  companies  as  he  sees 
fit  is,  like  much  else  in  modern  legislation,  a  vio- 
lation of  the  principle  that  ours  should  be  a 
"  government  of  laws  and  not  of  men." 

§  118.  Returns  not  Affected  by  Other  Revenue 
Statutes.  —  The  general  laws  applicable  to  the 
"  collection,  remission  and  refund "  of  internal 
revenue  taxes,  are,  so  far  as  applicable,  extended 
to  this  new  tax; 3  but  this  provision  applies  only 
to  the  collection  of  the  tax  after  it  has  been  as- 
sessed.4 It  can  have  no  reference  to  the  making 
or  correcting  of  the  return,  which  is  a  matter  that 
must  precede  the  assessment.  Indeed,  it  would 
seem  by  implication  to  exclude  all  internal  revenue 
laws  except  those  relating  to  the  collection,  remis- 

1  Act,  Par.  7  (infra  Appx.  I). 

2  Act,  Par.  7,  lines  3-4  (infra  Appx.  I). 

3  Act,  Par.  8,  lines  21-26  (infra  Appx.  I).    See  also  infra, 
§  127,  §  128. 

4  Cf.  infra  §  129. 


138      FEDERAL  CORPORATION  TAX  LAW. 

sign  and  refund  of  taxes  —  even  those  which,  if 
nothing  had  been  said  in  this  statute,  would 
proprio  vigore  have  extended  to  the  tax  thereby 
imposed.  For  the  law  governing  the  return,  we 
must  look  within  the  four  corners  of  this  Act. 


CHAPTER    VI 

THE    ASSESSMENT    AND    COLLECTION 

§§  119-122  The  Assessment. 

§  119        Assessment  to  be  made  on  the  returns. 
§  120         Nature  of  Commissioner's  duties. 
§  121        Amount  of  assessment. 
§  122        Time  of  assessment. 
§  123     Notice  and  payment  of  assessment. 
§  124     Payment  under  protest. 
§§  125-126  Collection. 
§  125         In  general  —  distraint,  etc. 
§  126         By  action  of  debt. 

§§  127-131  Application  of  other  internal  revenue  laws. 
§  127         In  general. 

§  128         Powers  of  Secretary  of  Treasury. 
§  129         Powers  of  Commissioner  of  Internal  Revenue. 
§  130         Powers  and  duty  of  collectors. 
§  131        Miscellaneous  other  provisions  of  internal-revenue 
laws. 

§  119.  The  Assessment  —  To  be  made  on  the 
Returns.  —  After  the  return  is  made,  the  next 
step  is  the  levying  of  the  assessment.  This  must 
be  done  by  the  Commissioner  of  Internal  Revenue, 
on  the  returns,1  either  as  originally  made  by  the 

1  Act,  Par.  5,  lines  1-3  (infra  Appx.  I).  See  also  supra 
§103,  §  106,  §  112. 


140      FEDERAL  CORPORATION  TAX  LAW. 

companies,  or  as  corrected  by  the  Commissioner. 
It  will  be  remembered  that,  according  to  the  scheme 
of  the  Act,  returns  shall  be  made  by  the  several 
companies,  and  shall  import,  for  purposes  of  the 
tax,  absolute  verity,  unless  corrected  in  the  mode 
provided  in  the  statute.  If  no  return  is  made, 
the  Commissioner  is  to  prepare  a  return,  upon 
evidence  obtained  in  the  manner  prescribed  by 
Congress;  and  similarly  if  upon  an  ex  parte 
examination  of  evidence  adduced  before  him  by 
any  person,  the  Commissioner  is  satisfied  that  a 
return  as  made  is  incorrect,  he  is  to  institute 
proceedings  to  procure  additional  evidence  from 
the  company,  its  books  and  its  officers,  and  upon 
the  evidence  so  acquired,  he  is  to  make  a  corrected 
return. 1 

§  120.  Nature  of  Commissioner's  Duties.  —  In 
supplying  a  return  where  none  has  been  made,  or 
in  correcting  an  erroneous  return,  the  Commis- 
sioner of  Internal  Revenue  is  exercising  a  dis- 
cretionary and  quasi- judicial  function.  But  in 
making  the  assessment  on  the  returns,  he  is 
acting  in  a  capacity  which  is  almost,  if  not  quite, 
ministerial.  To  make  the  assessment  from  the 
data  required  to  be  given  in  the  returns,  is  a  mere 
matter  of  arithmetic.  This  is  true  whether  the 
assessment  is  levied  upon  the  returns  as  made  by 
the  companies,  or  upon  returns  supplied  or  cor- 
rected by  the  Commissioner.  His  quasi- judicial 
duties  end  as  soon  as  the  corrected  return  is  com- 

1  Supra  §112. 


THE  ASSESSMENT   AND   COLLECTION.  141 

pleted  and  filed.  The  assessment  of  the  tax 
thereon  is  as  purely  a  matter  of  mathematics 
as  the  assessment  of  a  tax  on  returns  made  by 
the  companies. 

§  121.  Amount  of  Assessment.  —  The  amount 
of  the  assessment  in  ordinary  cases,  is  to  be  one 
per  cent  of  the  net  income  as  ascertained  from  the 
returns. x 

In  case  a  corporation  which  is  subject  to  the  tax 
has  failed  or  neglected  to  make  a  return,  or  to 
verify  the  same  by  oath  of  the  officers  mentioned 
in  the  statute,  so  that  the  Commissioner  of  In- 
ternal Revenue  is  obliged  to  prepare  a  return  on 
its  behalf,  then  fifty  per  cent  is  to  be  added  to  the 
tax.2  It  would  seem  that  this  addition  to  the  tax 
must  be  made  where  the  return  is  delayed  beyond 
the  time  limited  for  making  it,  although  it  be 
made  before  the  Commissioner  supplies  the  lack 
of  it  by  preparing  a  return  himself;  for  the  Act 
goes  on  to  provide  in  the  very  next  sentence  that 
in  case  of  neglect  to  make  a  return  caused  by 
the  illness  or  absence  of  an  officer,  or  other  just 
cause,  the  collector  may  allow  further  time,  not 
exceeding  thirty  days,  for  making  the  return, 
and  delivering  it  to  the  collector.3 

In  any  case  of  a  return  "  made  with  false  or 
fraudulent  intent, "  one  hundred  per  cent  is  to  be 


1  Act,  Par.  1,  lines  17-20. 
-2  Act,  Par.  5,  lines  6-8  (infra  Appx.  I). 
3  Act,  Par.  5,  lines  9-16  (infra  Appx.  I). 


142      FEDERAL  CORPORATION  TAX  LAW. 

added  to  the  amount  of  the  assessment,1  thus 
raising  it  from  one  to  two  per  cent  on  the  net 
income  in  excess  of  five  thousand  dollars. 

In  case  of  an  erroneous  return  made  under  a 
bona  fide  mistake,  there  is  no  provision  for^  in- 
creasing the  assessment  beyond  the  one  per  cent 
of  the  net  income.  The  Act  authorizes  assessment 
to  be  increased  only  in  cases  of  a  failure  to  make 
any  return  in  the  form  prescribed,  and  in  cases 
of  "  returns  made  with  false  or  fraudulent  intent." 
It  is  necessary  to  scrutinise  the  phraseology  of  the 
statute  rather  closely;  for  the  use  of  similar 
wording  is  rather  confusing.  Thus  "  false  or 
fraudulent  returns  "  in  the  middle  of  the  Fifth 
Paragraph 2  apparently  include  returns  which 
contain  honest  errors.3  The  same  is  perhaps  true 
of  "  false  or  fraudulent  return "  in  the  Eighth 
Paragraph.4  On  the  other  hand,  the  words, 
"  false  or  fraudulent  return,  or  statement,  with 

1  Act,  Par.  5,  lines  3-8  (infra  Appx.  I). 

2  Act,  Par.  5,  line  34  (infra,  Appx.  I). 

3  If  this  were  not  so,  there  would  be  no  provision  allow- 
ing  an    honestly   erroneous    return    to    be    corrected    after 
June    1st.       The    word    false    is  sometimes    construed   as 
equivalent  to  false  and  fraudulent,  and  is  sometimes  con- 
strued to  include  a  statement  which  is  merely  mistaken.    See 
3   Words   and   Phrases   Judicially   Defined    2654-2655,    tit. 
"  False  ";   McGowan  v.  Larsen,  66  Fed.  910,  914  (instruction 
to  jury  that  of  two  inconsistent  defences  one  must  be  "  false  " 
held  not  equivalent  to  charging  that  defendant  must  have 
been  guilty  of  a  wilfully  false   statement,   as   "  false  "   is 
equivalent  in  the  charge  to  "  erroneous  ");  14  C.  C.  A.  178. 

4  Act,  Par.  8,  line  6  (infra  Appx.  I). 


THE  ASSESSMENT   AND   COLLECTION.  143 

intent  to  defeat  or  evade  the  assessment/'  * 
appear  to  be  synonymous  with  the  words,  "  re- 
turn made  with  false  or  fraudulent  intent,"  2  and 
to  exclude  all  returns  which,  though  erroneous, 
are  bona  fide. 

§  122.  Time  of  Assessment.  —  Doubtless,  it  is 
the  Commissioner's  duty  to  proceed  to  levy  the 
assessment  promptly  on  the  receipt  of  returns  from 
a  collector.  At  all  events,  the  Act  provides  that 
the  assessment  shall  be  made  before  June  1st.3  In 
the  case  of  a  return  made  or  corrected  by  the  Com- 
missioner of  Internal  Revenue  after  June  1st,  it 
is  evidently  expected  that  the  assessment  thereon 
shall  be  made  immediately.  Failure  to  make  an 
assessment  within  the  time  limited  is  not  a  bar 
to  an  action  to  recover  the  amount  of  tax  due 
without  an  assessment,4  if  such  an  action  is  under 
any  circumstances  maintainable.5 

§  123.  Notice  and  Payment  of  Assessment.  — 
The  Act  provides  that  on  or  before  the  first  day  of 
June,  in  each  year,  the  several  companies  shall  be 
notified  of  the  amount  for  which  they  are  re- 
spectively liable. 6  This  statute  does  not  expressly 
provide  by  whom  this  notice  is  to  be  given;  but 

1  Act,  Par.  8,  lines  13-14  (infra  Appx.  I). 

2  Act,  Par.  5,  line  4  (infra  Appx.  I). 

3  Act,  Par.  5,  lines  25-30  (infra  Appx.  I). 

4  United  States  v.  Little  Miami  etc.,  R.  R.  Co.,  1  Fed. 
700,  reversed  as  to  other  points,  sub  nom.,  Little  Miami  etc. 
R.  Co.  v.  United  States,  108  U.  S.  277. 

5  As  to  which  see  supra  §  114  and  infra  §  126. 

6  Act,  Par.  5,  lines  26-30  (infra  Appx.  I). 


144      FEDERAL  CORPORATION  TAX  LAW. 

the  duty  would  seem  to  devolve  upon  the  col- 
lector.1 Nor  is  the  form  of  notice  prescribed. 
Oral  notice  would  therefore  be  sufficient. 

The  assessment  is  payable  on  or  before  June 
30th,2  and  to  any  sum  or  sums  which  may  remain 
unpaid  after  that  date  and  for  ten  days  after 
notice  and  demand,  there  shall  be  added  a  penalty 
of  five  per  cent  of  the  amount  of  tax  unpaid,  and 
also  interest  at  the  rate  of  one  per  cent  a  month, 
or  twelve  per  cent  a  year,  from  the  date  when  the 
same  became  due,  until  it  shall  be  paid.3  The 
receipt  of  notice  is  a  condition  to  the  exaction  of 
this  penalty  and  interest;  and  if  the  company 
pays  within  ten  days  after  receipt  of  notice,  it 
may  avoid  all  interest  and  penalty.  But  the 
interest,  whenever  collectible,  is  declared  to  run, 
not  from  the  date  of  the  receipt  of  notice,  but  from 
the  time  the  tax  became  "  due."  If  this  should 
be  construed  to  refer  to  the  thirtieth  of  June,  the 
result  would  be  that  where  notice  is  not  received 
until  after  June  30th,  prompt  payment  after 
notice  would  avoid  all  interest,  but  that  if  not 
paid  promptly,  interest  from  June  30th  would  be 
demandable. 

In  cases  where,  by  reason  of  failure  to  make  a 
return,  or  of  an  erroneous  return,  no  assessment 
is  made  until  after  June  30th,  tax  shall  be 

1  Rev.  Stats.  §  3184  (2  U.  S.  Comp.  Stats,  p.  2072).    And 
see  infra  §  130. 

2  Act,  Par.  5,  lines  30-32  (infra  Appx.  I). 

3  Act,  Par,  5,  lines  44-51  (infra  Appx.  I). 


THE  ASSESSMENT  AND   COLLECTION.  145 

payable  immediately  after  receipt  of  notice.1 
Unless  paid  within  ten  days  after  notice,  the 
penalty  of  five  per  cent  is  incurred,  and  interest 
begins  to  run,  either  from  the  date  of  receipt  of 
notice,  or  from  the  expiration  of  the  ten  days 
thereafter.2 

Payment  is  to  be  made  to  the  collector,  who  is 
authorized  to  receipt  for  the  same.3 

§  124.  Payment  tinder  Protest.  —  In  case  the 
assessment  is  for  any  reason  disputed,  the  com- 
pany should  pay  the  assessment  under  protest.4 

§  125.  Collection  —  In  General  —  Distraint,  etc. 
—  No  special  machinery  is  provided  in  the  Act 
for  the  collection  of  this  tax,  but  the  matter  of 
collection  is  expressly  left  to  be  governed  by  the 
laws  for  the  collection  of  other  internal  revenue 
taxes,  so  far  as  they  may  be  applicable.5  The 
assessment  of  this  tax  is  governed  exclusively  by 
the  Act  of  1909  by  which  it  is  imposed,  but  the 
collection  of  the  assessment  after  it  becomes  due 
and  payable  under  the  Act  of  1909,  is  governed 
by  the  same  laws  as  other  internal  revenue  taxes. 
The  general  laws  provide  that  taxes  unpaid  after 
demand  shall  be  a  lien  on  all  property  and  rights 
belonging  to  the  delinquent  tax  payer  from  the 

1  Act,  Par.  5,  lines  39-44  (infra  Appx.  I). 

2  Act,  Par.  5,  lines  44-51  (infra  Appx.  I). 

3  Rev.  Stats.,  §  3183  (2  U.  S.  Comp.  Stats,  p.  2072),  made 
applicable  by  the  Act  of  1909,  Par.  8,  lines  21-26. 

4  See  infra  §  137. 

5  Act,  Par.  8,  lines  21-26  (infra  Appx.  I). 


146      FEDERAL  CORPORATION  TAX  LAW. 

time  the  assessment  list  was  received  by  the 
collector.1  The  general  statutes  contain  full  pro- 
visions for  the  distraint  and  sale  of  personal  prop- 
erty,2 and  also  for  the  seizure  and  sale  of  real 
estate  3  either  by  distraint,4  or  by  proceedings  in 
chancery.5  If  the  delinquent  has  no  sufficient 
property  in  the  district  of  his  residence,  the  assess- 
ment may  be  certified  to  the  collector  of  any  other 
district,  who  is  authorized  to  proceed  in  the 
matter.6  All  such  matters  involve  no  questions 
peculiar  to  the  new  tax,  and  therefore  detailed 
discussion  would  be  inappropriate  here.  The  fees 
and  charges  in  cases  of  distraint  and  other  seizures 


1  Act,  March  1,  1879,  c.  125,  §  3  (2  U.  S.  Comp.  Stats. 
p.  2073). 

2  Rev.  Stats.,  §  3187-§  3195  (2  U.  S.  Comp.  Stats.,  pp. 
2073-2076);   Rev.  Stats.,    §  3205  (2  U.  S.  Comp.  Stats.,  p. 
2080). 

3  The    lien  of  the  United  States  for  taxes  in  arrears  is 
unaffected  by  state  recording  acts:   United  States  v.  Snyder, 
149  U.  S.  210. 

4  Rev.  Stats.,  §  3196- §  3205  (2  U.  S.  Comp.  Stats.,  pp. 
2077-2080).    A  sale  under  such  a  distraint  would  pass  only 
the  interest  of  the  delinquent  company,  and  would  not  affect 
the  rights  of  a  holder  of  a  paramount  title  or  of  a  lienor.    See 
Mansfield  v.  Excelsior  Ref.  Co.,  135  U.  S.  326;   Sheridan  v. 
Allen,  153  Fed.  568;  82  C.  C.  A.  522. 

5  Rev.  Stats.,  §  3207  (2  U.  S.  Comp.  Stats.,  p.  2081).    Cf. 
Blacklock  v.  United  States,  208  U.  S.  75  (holding  that  the 
remedy. in  equity  is  cumulative,  and  does  not  oust  the  right 
to  proceed  summarily  by  distraint). 

6  Rev.  Stats.,  §  3209  (2  U.  S.  Comp.  Stats.,  p.  2082). 


THE  ASSESSMENT  AND   COLLECTION.  147 

are  to  be  fixed  by  the  Commissioner  of  Internal 
Revenue.  * 

§  126.  By  Action  of  Debt.  —  An  action  of  debt 
will  of  course  lie  to  recover  the  amount  of  an  as- 
sessment, if  the  government  prefers  that  remedy 
to  the  more  summary  proceedings  by  way  of 
distraint.2  Perhaps  an  action  of  debt  may  be 
maintained  to  recover  the  amount  which  ought 
to  have  been  returned  and  assessed,  when  no 
assessment,  or  too  small  a  one,  has  been  made.3 
In  such  an  action  the  defendant  is  entitled  to  a 
credit  for  amounts  previously  overpaid.4  The 
burden  of  proof  is  on  the  government  to  show  the 
existence  of  profits,  and  that  they  were  not  off- 
set by  losses.5  It  seems  that  although  there  be 
no  statute  of  limitations  applicable  to  such  an 
action,  yet  "  in  a  case  where  commencement  of 
suit  by  the  United  States  is  delayed  many  years, 
and  the  delay  has  prejudiced  a  defendant  by  the 
disappearance  or  loss  of  evidence  essential  to  his 
defense,  courts  ought  to  apply  a  rule  that 
will  protect  individual  rights  by  giving  repose 


1  Rev.  Stats.,  §  3206  (2  U.  S.  Comp.  Stats.,  p.  2080). 

2  Dollar  Sav.  Bank  v.  United  States,  19  Wall.  227.    Such 
an  action  cannot  be  commenced  without  the  approval  of 
the  Commissioner  of  Internal  Revenue.     See  Rev.  Stats., 
§  3214  (2  U.  S.  Comp.  Stats.,  p.  2084). 

3  See  supra   §114. 

4  Missouri  River  etc.  Co.  v.  United  States,  19  Fed.  66. 

5  Little    Miami  etc.  R.  R.  Co.  v.  United  States,  108  U.  S, 
277;   2  Sup.  Ct.  Rep.  627. 


148      FEDERAL  CORPORATION"  TAX  LAW. 

and     security     to     the     citizen     against     stale 
claims."  1 

§  127.  Application  of  other  Internal  Revenue 
Laws.  —  Although  this  Act  of  Congress  contains 
within  itself  a  fairly  complete  rode  for  the  as- 
sessment of  the  tax,  providing  a  special  ma- 
chinery for  ascertaining  the  amount  of  taxable 
income,  yet  after  the  assessment  is  once  made, 
or  after  any  errors  therein  have  been  corrected 
in  the  mode  provided  in  the  Act,  the  statute  makes 
no  special  provisions  for  any  further  step  in 
respect  to  the  tax,  but,  as  already  stated,  remits 
the  whole  matter  of  its  collection  to  the  laws  re- 
lating to  the  collection  of  other  internal  revenue 
taxes,  "  so  far  as  applicable  to  and  not  inconsistent 
with  the  provisions  "  of  the  Act  of  1909.2  Now, 
in  investigating  which  of  the  numerous  provisions 
of  the  Revised  Statutes,  and  the  amendments 
thereto,  relating  to  internal  revenue,  are  thus 
extended  over  the  so-called  excise  tax  imposed 
by  the  Act  of  1909,  it  is  necessary  to  scrutinise 
closely  the  words  of  that  Act,  which  deal  with 
this  matter. 

Now,  in  the  first  place,  it  is  only  such  of  the 
internal  revenue  statutes  as  are  "  applicable  to 
.  .  .  the  provisions  of  this "  3  Act  which  are 
"  extended  and  made  applicable  to  the  tax  im- 

1  United  States  v.  Marquette  etc.  R.  Co.,  17  Fed.  719,  722. 

2  Act,  Par.  8,  lines  22-24. 

1  Act,  Par.  8,  lines  22-24  (infra  Appx.  I), 


THE  ASSESSMENT  AND   COLLECTION.  149 

posed  by  this  "  1  Act  of  1909.  To  be  sure,  there 
appears  to  be  some  absurdity  in  providing  that 
laws  which  are  already  "  applicable  "  to  this  new 
tax  should  be  "  made  applicable  "  thereto.  Such, 
however,  is  the  direct  language  of  Congress.  The 
solecism  is  more  apparent  than  real;  for  the 
intention  of  the  legislature  is  reasonably  clear,  — 
namely,  to  guard  against  excluding  by  implica- 
tion certain  laws  which  by  their  terms  are  broad 
enough  to  embrace  this  new  tax.  If  a  law  relating 
to  collection  and  refund  of  internal  revenue  taxes 
is  by  its  terms  "  applicable  "  to  this  new  tax,  it 
is  "  extended  and  made  applicable  "  thereto,  and 
by  those  words,  Congress  repels  the  possible 
inference  that  the  code  contained  in  this  new  Act 
for  the  collection  of  the  tax  thereby  imposed  was 
intended  to  be  exhaustive.  If,  therefore,  a  law 
is  "  applicable  "  by  its  terms  to  certain  specific 
taxes,  —  for  instance,  a  tax  on  tobacco,  whiskey, 
or  oleomargarine,  —  it  is  not  "  extended "  to 
this  new  tax. 

In  the  second  place,  it  is  only  such  internal- 
revenue  laws  as  by  their  terms  are  "  relating  to 
the  collection,  remission,  and  refund  of  internal 
revenue  taxes/' 2  that  are  by  this  Act  of  1909  made 
applicable  to  the  new  tax  thereby  imposed.  Laws 
which  relate  to  internal-revenue  taxes,  but  not 
to  the  collection,  remission  and  refund  thereof, 
are  not  made  applicable  to  this  new  tax,  even 

1  Act,  Par.  8,  lines  24-25  (infra  Appx.  I). 

2  Act,  Par.  8,  lines  21-22  (infra  Appx.  I). 


150  !     FEDERAL  CORPORATION  TAX  LAW. 

\ 

though  their  terms  are  sufficiently  comprehensive 
to  embrace  it.  On  the  contrary,  all  such  laws  are 
by  implication  excluded.  Expressio  unius  ex- 
clusio  alterius.  On  the  same  principle,  a  clause 
in  the  Act  of  Congress  imposing  the  tax  on  oleo- 
margarine, which  provided  that  certain  enumerated 
sections  of  the  Revised  Statutes  relative  to  internal- 
revenue  taxes  should  be  applied  to  the  oleomar- 
garine tax,  was  held  to  exclude  by  implication 
another  section,  although  the  terms  of  the  latter 
section  were  in  themselves  sufficiently  broad  to  have 
covered  the  oleomargarine  tax,  if  nothing  had  been 
said  in  the  oleomargarine  law  to  exclude  by  infer- 
ence its  application.1 

Bearing  these  principles  in  mind,  let  us  briefly 
survey  the  internal-revenue  statutes  of  the  United 
States  for  the  purpose  of  ascertaining  which  of 
them  relate  to  the  present  tax. 

§  128.  Powers  of  Secretary  of  Treasury.  —  The 
Secretary  of  the  Treasury  is  authorized  to  "  super- 
intend the  collection  of  the  revenue,"  and  to 
"  prescribe  forms  of  entries,  oaths,  bonds,  and 
other  papers,  and  rules  and  regulations  not  in- 
consistent with  law,  to  be  used  under  and  in  the 
execution  of  the  internal-revenue  laws."  2  To 

1  Schafer  v.  Craft,  144  Fed.  907;  In  re  Kinney,  102  Fed. 
468;   In  re  Kearns,  64  Fed.  481;   Tucker  v.  Gier,  160  Fed. 
611;   87  C.  C.  A.  513. 

2  Rev.  Stats.,   §251  (1  U.  S.  Comp.  Stats.,  p.  138).     A 
still  more  general  provision  authorises  any  head  of  a  depart- 
ment "  to  prescribe  regulations,  not  inconsistent  with  law,  for 
the  government  of  his  Department,  the  conduct  of  its  officers 


THE  ASSESSMENT  AND   COLLECTION.  151 

some  extent  this  authority  doubtless  extends  to 
the  new  tax.  Neither  "  entries  "  nor  "  bonds  " 
are  provided  for  in  connection  with  the  present 
tax,  and  to  that  extent  this  section  is  inapplicable. 
The  only  "  rules  and  regulations "  which  the 
Secretary  can  make  with  respect  to  the  new  tax 
relate  to  its  "  collection,  remission  and  refund"; 
he  has  no  power  to  make  regulations  respecting 
its  assessment.  The  only  rules  and  regulations 
upon  that  subject  are  prescribed  by  Congress  in 
the  Act.  The  section  of  the  Revised  Statutes 
above  cited  goes  on  to  provide  that  the  Secretary 
of  the  Treasury  "  shall  give  such  directions  to 
collectors  and  prescribe  such  rules  and  forms  to 
be  observed  by  them  as  may  be  necessary  for  the 
proper  execution  of  the  law."  This  provision 
would  seem  to  be  applicable  to  the  new  tax.  But 
it  must  be  borne  in  mind,  and  will  be  more  fully 
explained  in  a  moment,  that  the  duties  of  col- 
lectors in  connection  with  this  new  tax  are  not 
numerous  or  important  until  an  assessment  is 
placed  in  their  hands  for  collection  by  distraint. 
They  are  not  inquisitorial  officers,  as  they  are  in 

and  clerks,  the  distribution  and  performance  of  its  business, 
and  the  custody,  use  and  preservation  of  the  records,  papers 
and  property  appertaining  to  it."  Rev.  Stats.,  §  161  (1  U.  S. 
Comp.  Stats.,  p.  80),  held  in  Boske  v.  Commingore,  177 
U.  S.  459,  to  authorise  the  Secretary  of  the  Treasury  to 
forbid  collectors  to  produce  papers  in  their  custody  in  state 
courts  under  a  subpoena  duces  tecum.  As  to  the  extent  of  the 
power  to  prescribe  treasury  regulations,  see  supra  §  90, 
§101. 


152          FEDERAL  CORPORATION  TAX  LAW. 

connection  with  some  other  internal-revenue  taxes, 
such  as  the  tax  on  distillers. 

§  129.  Powers  of  Commissioner  of  Internal 
Revenue.  —  "  The  Commissioner  of  Internal  Rev- 
enue, under  the  direction  of  the  Secretary  of  the 
Treasury,  shall  have  general  superintendence 
of  the  assessment  and  collection  of  all  duties  and 
taxes  now  or  hereafter  imposed  by  any  law  pro- 
viding internal  revenue. "  l  This  provision  would 
seem  clearly  to  be  applicable  to  the  new  tax  so 
far  as  it  relates  to  the  "  collection  "  of  internal- 
revenue  taxes;  but  the  distinction,  which  runs  all 
through  the  internal-revenue  laws,2  between  the 
"  assessment  "  3  and  the  "  collection  "  thereof, 
must  always  be  remembered.  The  Act  of  1909 
adopts  only  so  much  of  this  section  as  relates  to 
the  "  collection  "  as  distinguished  from  the  "  assess- 
ment "  of  the  taxes.4 

This  Section,  §  321,  of  the  Revised  Statutes  goes 
on  to  provide  that  the  Commissioner  of  Internal 
Revenue,  under  the  direction  of  the  Secretary  of 
the  Treasury,  "  shall  prepare  and  distribute  all 
the  instructions,  regulations,  directions,  forms, 
blanks,  stamps,  and  other  matters,  pertaining 
to  the  assessment  and  collection  of  internal  rev- 

1  Rev.  Stats.,  §  321. 

2  For  example,   note  the  heading  of  Revised  Statutes, 
Title  35,  Chapter  2,  "  Of  Assessments  and  Collections." 

3  As  to  the  meaning  of  the  word  "  assessment,"  see   Jack- 
son Lumber  Co.  v.  McCrimmon,  164  Fed.  759,  763-764. 

*Cf.  supra,  §  118,  §  127,  and  infra  §  130. 


THE  ASSESSMENT  AND  COLLECTION.  153 

enue."  This  provision  also  is  applicable  to  the 
"  collection  "  of  the  new  tax;  but  the  same  dis- 
tinction between  assessment  and  collection  is 
again  to  be  noted.  The  only  power  of  the  Com- 
missioner of  Internal  Revenue  to  prescribe  forms 
in  connection  with  the  assessment  of  this  tax  is 
that  expressly  vested  in  him  by  the  Act  of  1909 
to  prescribe  the  form  of  return.1 

Section  3182,2  as  to  the  making  of  assessments 
by  the  Commissioner  of  Internal  Revenue  and  as 
to  the  correction  of  imperfect  lists,  is  inconsistent 
with  the  Act  of  1909,  which  contains  full  pro- 
visions upon  that  subject.3  Moreover,  it  relates 
to  the  "  assessment,"  rather  than  the  "  collec- 
tion "  of  taxes. 

§  130.  Powers  and  Duty  of  Collectors.  —  As 
already  stated,  the  duties  of  collectors,4  in  con- 
nection with  the  present  tax,  are  few  and  simple, 
until  an  assessment  has  been  made  and  is  placed 
in  their  hands  for  collection.  They  are  to  receive 
the  returns  made  by  the  corporations,  and  forth- 
with transmit  them  to  the  Commissioner  of  In- 
ternal Revenue;  5  —  that  is  all.  By  general 
provision  of  law,  each  collector  within  his  dis- 
trict, is  to  "  see  that  all  laws  and  regulations 

1  See  supra  §  90. 

2  Rev.  Stats.,  §  3182  (2  U.  S.  Comp.  Stats.,  p.  2071). 

3  See  supra  §  106-§  113. 

4  As  to  delegation  of  duties  to  deputy"collectors,  see  Act, 
March  1st,  1879,  c.  125,  §  2  (2  U.  S.  Comp.  Stats.,  p.  2043). 

5  Supra  §  89,  §  102. 


154      FEDERAL  CORPORATION  TAX  LAW. 

relating  to  the  collection  of  internal  taxes  are 
faithfully  executed  and  complied  with,  and  shall 
aid  in  the  prevention,  detection  and  punishment 
of  any  frauds  in  relation  thereto/71  This  provi- 
sion is  undoubtedly  to  some  extent  applicable 
to  the  present  tax;  but  as  will  appear  below,  its 
application  is  limited  by  the  lack  of  ability  of 
collectors  under  the  law  to  acquire  information 
as  to  frauds  upon  this  new  law.  Similar  remarks 
are  applicable  to  another  general  provision  of 
law  directing  each  collector  to  cause  his  deputies 
"  to  proceed  through  every  part  of  his  district  and 
inquire  after  and  concerning  all  persons  therein 
who  are  liable  to  pay  any  internal  revenue  tax."  2 
Collectors  are  in  some  circumstances  authorized 
to  administer  oaths,  and  to  take  evidence,  touch- 
ing any  part  of  the  administration  of  the  internal- 
revenue  laws  with  which  they  are  charged  or 
when  such  oaths  and  evidence  are  authorized 
by  law  or  regulation  to  be  taken.3  This  section 
may  authorize  collectors  to  administer  the  oath 

1  Rev.  Stats.,  §  3163,   as  amended   by  Act,   March   1st, 
1879,  c.  125,  §  2  (2  U.  S.  Comp.  Stats.,  p.  3163).  See  also  Rev. 
Stats.,  §  3169  (2  U.  S.  Comp.  Stats.,  p.  2059)  as  to,  inter  alia, 
duty  to  report  violations  of  law  to  superior  officer;    Rev. 
Stats.,  §  3164  (2  U.  S.  Comp.  Stats.,  p.  2057),  as  to  duty  to 
report  violations  of  law  to  district  attorney. 

2  Act,  Aug.  27,   1894,  c.  349  §  34  (2  U.  S.  Comp.   Stats., 
p.  2065).    The  word  "  person  "  in  this  statute  includes  corpo- 
rations.   See  Rev.  Stats.,  §  1  (1  U.  S.  Comp.  Stats.,  p.  3). 

3  Rev.  Stats.,  §  3165,  as  amended  in  1879  (2  U.  S.  Comp. 
Stats.,  p.  2057). 


THE  ASSESSMENT   AND   COLLECTION.  155 

to  officers  of  corporations  swearing  to  their  re- 
turns; but  would  seem  to  have  no  other  application 
to  proceedings  under  this  Act  of  1909. 

The  general  statute  prohibiting  collectors  and 
other  officers  or  employees  from  divulging  in  any 
manner  not  authorized  by  law,  information  ac- 
quired by  them  in  the  course  of  their  official  duties, 
would  seem  to  be  largely,  if  not  altogether,  super- 
seded, as  to  this  tax,  by  the  special  provisions 
on  that  subject,  contained  in  the.  Act  of  1909.  * 

Section  3173  of  the  Revised  Statutes,  which  was 
amended  by  Act  of  1894, 2  relates  to  returns  to  the 
collectors  by  persons  liable  to  tax;  but  this 
section  is  manifestly  inconsistent  with  the  pro- 
visions of  the  Act  of  1909,  and  is  for  other  reasons 
inapplicable  to  the  tax  thereby  imposed.3  This 
is  a  quite  important  point,  because  this  section 
authorizes  the  collector  to  summon  the  person 
liable  to  the  tax,  and  to  compel  him  to  produce 
his  books  for  inspection.  The  two  succeeding 
sections  of  the  Revised  Statutes,4  relate  respect- 

1  As  to  which,  see  supra  §  116,  §  117. 

2  Act  1894,  c.  349,  §  34  (2  U.  S.  Comp.  Stats.,  pp.  2065- 
2067).    This  section  was  among  those  held  void  in  Pollock  v. 
Farmers'  L.  &  T.  Co.,  158  U.  S.  601,  637;   15  Sup.  Ct.  Rep. 
912;   157  U.  S.  429;   15  Sup.  Ct.  Rep.  673. 

3  It  should  be  noted  that  the  section  prior  to  the  void 
amendment  of  1894  related  merely  to  taxes  on  "  articles  or 
objects  charged  with  a  special  duty  or  tax,"  and  on  "  goods, 
wares,  and  merchandise,"  or    tangible    property,  and    not 
to  taxes  on  business  or  income,  such  as  this  new  tax  of  1909. 

4  Rev.  Stats.   §  3174,  §  3175  (2  U.  S.  Comp.  Stats.,  pp. 
2067,   2068). 


156      FEDERAL  CORPORATION  TAX  LAW. 

• 

ively  to  the  form  and  service  of  such  a  summons, 
and  to  the  punishment  for  disobedience  thereof. 
As  the  provision  for  the  summons  itself  has  no 
application  to  this  corporation  tax,  those  two 
subsidiary  sections  are  likewise  irrelevant. 

The  following  section  of  the  Revised  Statutes,1 
attempted  to  be  amended  in  1894,2  authorizes 
collectors  to  make  returns  where  no  return  has 
been  made  as  required  by  law,  or  where  a  fraudu- 
lent return  has  been  made.  This  section  is  in- 
applicable (1)  because  it  relates  to  the  "  assess- 
ment "  rather  than  to  the  "  collection  "  of  the 
tax,3  (2)  because  the  Act  of  1909  contains  different 
and  inconsistent  provisions  for  supplying  a  return 
where  none  has  been  made,  and  for  correcting 
an  erroneous  return,4  and  (3)  because  this  section, 
prior  to  the  void  amendment  of  1894,  merely 
authorized  collectors  to  make  returns  of  "  06- 
jects  liable  to  tax/'  whereas  the  tax  of  1909  is 
not  levied  upon  objects,  but  upon  income,  fran- 
chise, or  business. 

The  next  section  of  the  Revised  Statutes  au- 
thorizes collectors  to  enter  in  the  day  time  any 
building  or  place  where  "  articles  or  objects  sub- 
ject to  tax  "  are  kept,  for  the  purpose  of  exam- 

1  Rev.  Stats.,  §  3176  (2  U.  S.  Comp.  Stats.,  p.  2069). 

2  Act,  Aug.  27,  1894,  c.  349,  §  34,  held  void  in  Pollock  v. 
Farmers1  L.  &  T.  Co.,  158  U.  S.  601,  637;   15  Sup.  Ct.  Rep. 
912;   157  U.  S.  429;   15  Sup.  Ct.  Rep.  673. 

3  See  supra  §  118,  §127,  §  129. 

4  See  supra  §  104,  §  106-§  113. 


THE  ASSESSMENT   AND   COLLECTION.  157 

ining  them;  l  but  as  there  are  no  "  articles  or 
objects  liable  to  tax  "  under  the  Act  of  1909,  this 
provision  has  no  application  to  the  tax  imposed 
thereby.2 

Section  3179,3  imposing  penalties  for  false 
return,  or  for  refusal  to  produce  books  when  or- 
dered, is  inconsistent  with  the  provisions  of  the 
Act  of  1909,  and  is  for  other  reasons  inapplicable. 

Section  3184 4  relates  to  notice  of  assessment; 
and  is  so  far  applicable  to  this  tax  as  to  impose 
upon  the  several  collectors  the  duty  of  serving 
notice  of  assessment  and  demand  for  payment 
under  the  Act  of  1909. 

§  131.  Miscellaneous  Other  Provisions  of  In- 
ternal Revenue  Laws.  —  The  other  provisions  of 
the  internal-revenue  laws,  except  those  which  are 
specially  considered  elsewhere  in  this  treatise, 
are  either  manifestly  inapplicable  to  this  tax, 
or  else  they  relate  to  collection,  by  distraint  or 
otherwise,  after  an  assessment  has  been  made, 
in  which  case  they  are  certainly  applicable. 

!Rev.  Stats.,  §3177  (2  U.  S.  Comp.  Stats.,  pp.  2069- 
2070).  A  query  has  been  thrown  out  whether  this  section 
applies  to  a  place  where  paid  unstamped  bank  cheques  are 
kept:  United  States  v.  Mann,  95  U.  S.  580,  584. 

2  Rev.  Stats.,  §  3180  (2  U.  S.  Comp.  Stats.,  p.  2071),  as 
to  inspection  of  taxable  objects  owned  by  non-residents, 
is  for  similar  reasons  inapplicable. 

3  Rev.  Stats.,  §  3179  (2  U.  S.  Comp.  Stats.,  p.  2070). 

4  Rev.  Stats.,  §  3184  (2  U.  S.  Comp.  Stats.,  p.  2072). 


CHAPTER  VII 

REMEDIES 

§  132  No  direct  appeal  to  court  provided. 

§  133  Injunction. 

§  134  Mandamus,  etc. 

§  135  Passive  resistance. 

§  136  Action  of  trespass,  trover,  etc.,  for  goods  distrained. 

§  137  Action  to  recover  back  taxes  paid  under  protest. 

§  138  Remedy  by  application  to  Commissioner  of  Internal 
Revenue. 

§  132.  —  No  Direct  Appeal  to  Court  Provided.  — 

In  the  assessment  of  a  tax,  particularly  a  tax 
which  involves  so  many  difficult  questions  of 
accounting,  and  of  the  law  of  capital  and  income, 
errors  are  very  likely  to  be  committed  by  the  ad- 
ministrative officials  charged  with  the  assessment 
and  collection  of  the  tax.  Nevertheless,  this  law 
gives  no  appeal  to  court  for  a  direct  review  of 
the  intricate  questions  of  law  and  fact  which  will 
constantly  arise.  The  absence  of  some  provision 
for  a  review  by  an  impartial  tribunal  is  certainly 
a  blemish  in  the  law.  The  Commissioner  of 
Internal  Revenue,  who  is  charged  by  this  Act 
with  quasi-judicial  functions,  is  an  officer  or 
agent  of  the  government,  and  as  such  his  duty 


REMEDIES.  159 

is  to  be  zealous  in  augmenting  the  revenue  of  the 
government.  He  cannot  be  at  once  a  zealous 
agent  of  the  United  States  and  an  impartial 
judge  'between  the  government  and  the  tax- 
payer. 

It  is  true  that  the  fact  that  the  returns  made 
by  the  several  corporations  are  to  be  taken  as 
prima  facie  correct  and  that  all  assessments  are 
to  be  made  "  thereon  "  unless  affirmative  evidence 
of  their  falsity  is  produced  before  the  Commis- 
sioner l  is  some  protection  to  the  companies  which 
are  subject  to  the  tax;  but  whenever  the  Com- 
missioner exercises  quasi-judicial  functions  in  re- 
spect to  intricate  questions  of  law,  as  he  does 
whenever  it  becomes  his  duty  to  prepare  a  cor- 
rected return,  there  ought  to  be  some  simple, 
cheap  and  speedy  remedy  by  a  judicial  review  of 
his  rulings. 

This  statute  remits  the  whole  matter  to  the 
general  provisions  of  the  statutes  of  the  United 
States  for  the  collection,  remission  and  refund  of 
internal-revenue  taxes.2  To  the  general  remedies 
against  illegal  taxes,  as  existing  by  the  common 
law  of  the  several  states  and  as  regulated  or  enlarged 
by  the  general  internal-revenue  statutes  of  the 
United  States,  we  must  therefore  look. 

§  133.  Injunction.  —  Although  courts  of  equity, 
in  order  to  avoid  irreparable  injury  and  multiplicity 
of  suits,  would  sometimes  apart  from  statute 

*See  supra  §  103,  §  106,   §  119,   §  120. 
2  Act,  Par.  8,  lines  21-26  (infra  Appx.  I). 


160      FEDERAL  CORPORATION  TAX  LAW. 

enjoin  the  collection  of  an  illegal  tax,  yet  as  to 
federal  taxes  this  remedy  is  specifically  prohibited 
by  Act  of  Congress,  which  provides  that  "  no 
suit  for  the  purpose  of  restraining  the  assessment 
or  collection  of  any  tax  shall  be  maintained  in 
any  court."  *  This  statute,  however,  does  not 
apply  to  a  suit  by  a  shareholder  in  a  corporation 
to  enjoin  the  company  and  its  directors  from 
voluntarily  paying  an  unconstitutional  tax.  Such 
a  suit  can  therefore  be  maintained  on  the  ground 
that  it  is  ultra  vires  to  apply  money  belonging  to 
the  company  in  payment  of  an  unconstitutional 
tax.2  It  does  not  appear,  however,  that  this 
principle  has  ever  been  extended  to  an  injunction 
against  paying  a  tax  which  is  neither  unconstitu- 
tional or  illegal  as  a  whole  but  is  merely  erro- 
neous as  to  amount.  This  remedy  by  a  share- 
holder's bill  may,  therefore,  be  invoked  in  order 
to  test  the  constitutionality  of  the  present  law; 
but  it  is  more  doubtful  whether  it  would  afford 
relief,  if  the  Act  is  not  wholly  unconstitutional, 
in  order  to  restrain  the  directors  from  paying  a 
tax  which  is  assessed  on  erroneous  principles  - 
for  example,  where  some  items  -are  wrongly  in- 

1  Rev.  Stats.,  §  3224  (2  U.  S.  Comp.  Stats.,  p.  2088)  en- 
forced in  Snyder  v.  Marks,  109  U.  S.  189;   3  Sup.  Ct.  Rep. 
157;  Miles  v.  Johnson,  59  Fed.  38;  Delaware  R.  Co.  v.  Pretty- 
man,  7  Fed.  Cas.  408. 

2  Pollock  v.  Farmers1  L.  &  T.  Co.,  157  U.  S.  429,  453-454; 
15  Sup.  Ct.  Rep.  673;   158  U.  S.  601;   15  Sup.  Ct.  Rep.  912. 
As  to  such  suits,  see  also  2  Machen,  Mod.  Law  of  Corps., 
§  1153,  and  Memphis  City  v.  Dean,  8  Wall.  64,  73. 


REMEDIES.  161 

eluded  in  the  gross  revenue  or  where  the  Commis- 
sioner of  Internal  Revenue  has  not  given  the 
company  the  benefit  of  the  deductions  to  which 
it  is  entitled.  If  it  should  be  thought  ultra  vires 
for  directors  of  a  corporation  to  divulge  any  of 
the  secrets  of  the  company  except  under  com- 
pulsion of  law,  a  shareholder  might  enjoin  them 
from  setting  out  in  their  return  any  particulars  in 
regard  to  its  business  not  required  by  the  Act 
to  be  stated  therein;  but  except  under  very 
peculiar  charters  the  directors  have  ample  power 
at  their  discretion  to  disclose  any  facts  about 
.the  company  to  the  public  or  any  person  they 
please,  even  a  tax-collector,  and  therefore  they 
could  not  be  enjoined  from  doing  so. 

§  134.  Mandamus,  etc.  —  No  state  court  has 
power  to  issue  a  writ  of  mandamus  to  a  federal 
officer  in  any  case.1  Moreover,  the  United  States 
Courts  have  no  power  to  issue  that  writ  except 
as  incidental  to  their  appellate  jurisdiction.2 
But  the  courts  of  the  District  of  Columbia,  where 
the  office  of  the  Commissioner  of  Internal  Revenue 
is  situated,  may  in  a  proper  case  issue  a  mandamus 
against  him  as  against  any  head  of  a  bureau,3 


1  McClung  v.  Silliman,  6  Wheat.  598. 

2  Mclntire  v.  Wood,  7  Cranch  504;   Marbury  v.  Madison, 
1  Cranch  137;    McClung  v.  Silliman,  2  Wheat.  369;   County 
of  Greene  v.  Daniel,  102  U.  S.  187,  195;  Davenport  v.  County 
of  Dodge,  105  U.  S.  237. 

3  United  States  v.  Black,  128  U.  S.  40;   9  Sup.  Ct.  Rep. 
12;  Butterworth  v.  Hoe,  112  U.  S.  50;  5  Sup.  Ct.  Rep.  25. 


162      FEDERAL  CORPORATION  TAX  LAW. 

or  even  against  a  cabinet  officer.1  If,  therefore, 
the  Commissioner  should  omit  to  perform  any 
ministerial  duties  imposed  upon  him  by  this 
Act,  he  might  be  coerced  by  mandamus.2  For 
instance,  if  he  should  decline  to  make  the  assess- 
ment on  the  return  as  filed,  without  any  evidence 
produced  before  him  of  its  incorrectness,  —  for 
example,  merely  because  the  corporation  had 
refused  to  state  in  the  return  particulars  demanded 
by  the  Commissioner  in  addition  to  those  re- 
quired by  Congress  to  be  set  out  therein  —  it  is 
submitted  that  mandamus  would  lie  to  compel 
him  to  perform  his  ministerial  duty  of  calculating 
the  amount  of  the  assessment  on  the  data  furnished 
in  the  return.  On  the  other  hand,  the  United 
States  courts  will  not  control  a  federal  executive 
officer  in  the  exercise  of  quasi-judicial  functions,3 
even  though  the  questions  before  him  be  questions 
of  pure  law.4 

1  United  States  v.  Schurz,  102  U.  S.  378;    Marbury  v. 
Madison,  1  Cranch  137;    Kendall  v.  United  States,  12  Pet. 
524  (to  be  compared  with  Kendall  v.  Stokes,  3  How.  87,  an 
unsuccessful  action  for  damages  against  the  cabinet  officer) . 

2  As  to  the  remedy  by  certiorari,  cf .  Alexandria  Canal  Co. 
v.  The  District,  5  Mackey  (D.  C.)  376. 

3Carrick  v.  Lamar,  116  U.  S.  423;  6  Sup.  Ct.  Rep.  424; 
United  States  v.  Windom,  137  U.  S.  636;  ll  Sup.  Ct.  Rep. 
197;  United  States  v.  Elaine,  139  U.  S.  306;  11  Sup.  Ct. 
Rep.  607. 

4Gaines  v.  Thompson,  7  Wall.  347;  United  States  v. 
Black,  128  U.  S.  40;  9  Sup.  Ct.  Rep.  12;  Commissioner  of 
Patents  v.  Whiteley,  4  Wall.  522;  Decatur  v.  Paulding,  14 
Pet.  497. 


REMEDIES.  163 

§  135.  Passive  Resistance.  —  Another  remedy 
.which  may  sometimes  be  better  is  by  what  may 
be  called  passive  resistance.  That  is  to  say,  the 
company,  having  done  what  it  conceives  to  be 
its  full  duty  in  supplying  a  return,  may  quietly 
and  passively  refuse  to  do  anything  further.  It 
will  then  become  necessary  for  the  Commissioner 
of  Internal  Revenue  to  invoke  the  aid  of  the 
United  States  Courts  in  order  to  compel  the  officers 
to  testify  and  to  produce  the  company's  books. 
In  these  legal  proceedings,  the  jurisdiction  of 
the  Commissioner  to  proceed  to  examination  of 
the  officers  and  inspection  of  the  books  can  be 
attacked  and  tested.1 

§  136.  Action  of  Trespass,  Trover,  etc.,  for  Goods 
Distrained.  —  If  a  corporation,  conceiving  that 
an  assessment  is  illegal,  refuses  to  pay  the  same, 
its  goods  may  be  seized  and  sold  under  distraint 
proceedings.  If  the  assessment  is  void  and  if  the 
facts  to  show  its  invalidity  appear  on  its  face,  the 
officer  who  levies  the  distraint  may  be  sued  in 
trover,  trespass  or  other  appropriate  action. 
Such  an  action  may  be  maintained  without  first 
appealing  to  the  Commissioner  of  Internal  Rev- 
enue.2 If,  however,  the  assessment  is  fair  on  its 
face  and  made  by  an  officer  having  jurisdiction, 
the  collector  will  be  protected  in  acting  thereunder 
though  it  may  be  erroneous,  at  any  rate  unless 


1  See  supra  §  108. 

2  Erskine  v.  Hohnbach,  14  Wall.  613. 


164      FEDERAL  CORPORATION  TAX  LAW. 

he  is  informed  of  extraneous  facts  which  render 
the  assessment  invalid.1 

§  137.  Action  to  Recover  Back  Taxes  Paid  under 
Protest.  —  The  usual  remedy  to  test  the  legality 
of  assessments  of  federal  taxes  is  by  first  paying 
the  taxes  under  protest  and  then  bringing  an 
action  of  assumpsit  against  the  collector  to  recover 
back  the  amount  so  paid; 2  but  money  paid 
without  protest  cannot  be  recovered  back,3  nor 
will  protest  suffice  unless  under  threat  of  pro- 
ceedings by  the  government  to  collect  the  tax.4 
The  declaration  or  complaint  should  set  out  the 
transactions  upon  which  the  assessment  was  made.5 

1  Erskine  v.  Hohnbach,  14  Wall.  613;   Stutsman  County 
v.  Wallace,  142  U.  S.  293,  310;   12  Sup.  Ct.  Rep.  297;  Dela- 
ware R.  Co.  v.  Prettyman,  7  Fed.  Cas  408. 

2  Elliott  v.  Swartwout,  10  Pet.  137;  Erskine  v.  Van  Ars- 
dale,  15  Wall.  75;    Assessor  v.  Osbornes,  9  Wall.  567,  574; 
Commissioners  v.  Buckner,  48  Fed.  533;    Chicago  Distilling 
Co.  v.  Stone,  140  U.  S.  647;  11  Sup.  Ct.  Rep.  862;  Armour  v. 
Roberts,  151  Fed.  846  (recovery  allowable  though  collector 
would  not  be  liable  as  a  trespasser).    As  to  execution  on  a 
judgment  for  the  plaintiff  in  any  such  action,  see  Rev.  Stats. 
§999  (1  U.  S.  Comp.  Stats.  708),  construed  in  Agnew  v. 
Haymes,  141  Fed.  631. 

3  Elliott  v.  Swartwout,   10  Pet.   137.     The  protest  need 
not  be  in  writing:    Wright  v.  Blakeslee,  101  U.  S.  174,    179 
(headnote  inadequate) .  Anything  sufficient  to  apprise  the  col- 
lector that  the  taxpayer  contends  that  the  taxes  are  illegal 
and  intends  to  sue  for  their  recovery  is  enough:  Herold  v. 
Kahn,  159  Fed.  608;  86  C.  C.  A.  598. 

4  Cheeseborough  v.  United    States,   192    U.  S.   253;    24 
Sup.  Ct.  Rep.  262. 

5  Haight  &  Freese  Co.  v.  McCoach,  135  Fed.  894. 


REMEDIES.  165 

Interest  is  recoverable  from  the  date  of  the  pay- 
ment.1 Under  the  Tucker  Act,  such  claims  may 
be  made  the  subject  of  an  action  against  the 
United  States  in  the  Court  of  Claims  or  in  a  United 
States  Circuit  or  District  Court.2 

This  remedy  against  the  collector  as  well  as 
against  the  United  States  may  constitutionally 
be  taken  away  by  Congress; 3  and  under  the 
Internal  Revenue  Laws  it  is  provided  that  an 
appeal  to  the  Commissioner  of  Internal  Revenue 
to  repay  the  amount  of  the  tax  shall  be  a  condi- 
tion precedent  to  the  institution  of  any  such 
action.4  There  has  been  some  doubt  whether  this 
statute  applies  where  the  original  assessment 
which  is  alleged  to  be  illegal  was  made  by  the 
Commissioner  himself  and  where  there  has  already 

1  Erskine  v.  Van  Arsdale,  15  Wall.  75;   Kinney  v.  Conant, 
166  Fed.  720;  McClain  v.  Pennsylvania  Co.,  108   Fed.    618; 
47  C.  C.  A.  529;  Herold  v.  Kahn,  163  Fed.  947.    Cf.  Commis- 
sioners v.  Buckner,  48  Fed.  533;    Burrough  v.  Abel,   105 
Fed.  366  (interest  disallowed  on  account  of  laches). 

2  Christie-Street  Commission  Co.   v.   United  States,    136 
Fed.   326   (distinguishing   United   States  v.  Savings  Bank, 
104  U.  S.  728,  734);  Dooley  v.  United  States,  182  U.  S.  222; 
21  Sup.  Ct.  Rep.  762. 

3  Gary  v.  Curtis,  3  How.  236. 

4  Rev.  Stats.,    §3226   (2  U.  S.  Comp.  Stats,  p.   2088), 
enforced  in  Hubbard  v.  Collector,  12  Wall.  1.    Cf.  De  Barry 
V.  Dunne,  162  Fed.  961  (holding  that  defense  based  on  non- 
performance  of  the  statutory  condition  is  not  waived  by 
general  appearance  and  plea  to  the  merits).    As  to  what  is 
necessary  evidence  in  order  to  prove  compliance  with  this 
statute,  see  Hubbard  v.  Kelley,  8  W.  Va.  46. 


166      FEDERAL  CORPORATION  TAX  LAW. 

been  a  hearing  of  the  question  before  him.1 
But  the  safer  plan  is  even  in  that  case  to  address 
to  him  an  appeal  for  refunding  of  the  tax  before 
bringing  suit.2  In  order  to  comply  with  this 
statute  there  must  first  be  an  application  to  the 
collector  and  an  adverse  decision  by  him  and  from 
him  an  appeal  to  the  Commissioner;  and  therefore 
an  application  to  the  Commissioner  in  the  first 
instance  is  not  enough,  though  rejected  by  him, 
to  authorise  the  institution  of  an  action  against 
the  collector.3  The  mere  noting  of  protest  on 
the  return  against  the  form  on  which  it  is  required 
to  be  made  is  not  enough.4  The  statute  does  not 
prevent  a  citizen  from  defending  a  suit  for  col- 
lection of  an  illegal  tax  without  first  appealing  to 
the  Commissioner,5  nor  does  it  apply  to  an  action 
of  trespass  against  a  collector  for  seizing  plaintiff's 
property  under  an  illegal  distraint. 6 

There  is  a  period  of  limitations  of  two  years 
prescribed  by  Congress  for  the  institution  of  such 


1  Cf.  De  Barry  v.  Dunne,  162  Fed.  961;    Tucker  v.  Grier, 
160  Fed.  611;  87  C.  C.  A.  513. 

2  For    the    statute    apparently    contemplates    an    appeal 
made  to  the  Commissioner  after  payment  of  the  tax:   Kings 
County  Sav.  Institution  v.  Blair,  116  U.  S.  200,  205;   6  Sup. 
Ct.  Rep.  353.    But  see  Schwarzchild  v.  Rucker,  143  Fed.  656. 

3  Cheeseborough  v.  United  States,  192  U.  S.  253,  262-263. 

4  Kings  County  Sav.  Institution  v.  Blair,  116  U.  S.  200, 
205  (headnote  inadequate) ;  6  Sup.  Ct.  Rep.  353. 

5  Clinkenbeard  v.  United  States,  21  Wall.  65. 

6  Supra  §136. 


REMEDIES.  167 

suits.1  Moreover,  such  a  suit  cannot  be  main- 
tained unless  the  appeal  to  the  Commissioner 
was  taken  within  the  time  limited  for  taking 
such  appeals.2  The  period  of  limitations  prescribed 
by  Rev.  Stats.  §  3227  applies  to  suits  brought 
against  the  United  States  under  the  Tucker  Act 
as  well  as  to  suits  against  the  collector.3 

This  remedy  is  very  efficient  where  the  assess- 
ment is  wholly  void.  Even  if  it  is  not  wholly 
void,  but  is  merely  made  upon  an  erroneous  prin- 
ciple in  conflict  with  some  statutory  direction  so 
as  to  be  excessive,  the  party  aggrieved  may  have 
the  aid  of  the  courts  to  recover  the  amount  of 
the  excess; 4  but  he  cannot  have  a  review  of  any 
question  of  valuation  committed  to  the  judg- 
ment of  the  assessing  tribunal.5  If,  however, 

1  Rev.  Stats.,  §  3227  (2  U.  S.  Comp.  Stats,  p.  2089).    Cf. 
Wright    v.  Blakeslee  101  U.  S.  174  (holding  that  the  period 
does  not  begin  to  run  until  rejection  of  the  claim  by  the 
Commissioner) ;  Commissioners  v.  Buckner,  48  Fed.  533  (bar 
removed  by  Act  of  Congress);   Hicks  v.  James,  48  Fed.  542 
(claim  held  not  barred),  affirmed,  James  v.  Hicks,  110  U.  S. 
272;  4  Sup.  Ct.  Rep.  6;  Cheatham  v.  United  States,  92  U.  S. 
85;    Braun  v.  Sauerwein,    10  Wall.   218;    Schwafzchild  v. 
Rucker,  143  Fed.  656  (if  appeal  to  Commissioner  not  decided 
within  six  months  action  barred  at  end  of  two  years  after 
expiration  of  the  six  months) . 

2  Kings  County  Sav.  Institution  v.  Blair,  116  U.  S.  200; 
6  Sup.  Ct.  Rep.  353. 

3Farrell  v.  United  States,  167  Fed.  639;  Christie  Street 
Commission  Co.  v.  United  States,  136  Fed.  326. 

4  Herold  v.  Shanley,  146  Fed.  20,  and  many  other  cases. 

5  Stanley  v.  Supervisors  of  Albany,  121  U.  S.  535,  550- 


168      FEDERAL  CORPORATION"  TAX  LAW. 

the  Commissioner  of  Internal  Revenue  should 
in  undertaking  to  correct  a  return  receive  illegal 
evidence  —  for  instance,  if  he  should  consider 
evidence  of  other  witnesses  than  officers  and 
employees  of  the  company  and  its  books  and 
papers  —  his  corrected  return  and  the  assessment 
thereon  would  be  illegal;  and  the  action  to  recover 
back  the  taxes  paid  under  protest  might  be 
maintained. 

§  138.  Remedy  by  Application  to  Commissioner 
of  Internal  Revenue.  —  The  federal  statutes  ex- 
pressly authorise  the  Commissioner  of  Internal 
Revenue  to  refund  taxes  erroneously  or  illegally 
assessed  or  collected,  or  taxes  unjustly  assessed 
or  excessive  in  amount,  or  in  any  manner  wrong- 
fully collected.1  Such  application  to  the  Com- 
missioner can  only  be  made  within  two  years.2 
The  lodging  of  an  appeal  with  the  collector  for 
transmission  in  due  course  to  the  Commissioner 
is  in  effect  a  presentation  of  the  appeal  to  the 
Commissioner  within  the  meaning  of  a  statute* 
limiting  the  time  within  which  appeals  may  be 
presented  to  the  Commissioner.3  In  exercising 

551;  7  Sup.  Ct.  Rep.  1234.  Cf.  United  States  v.  Rindskopf, 
105  U.  S.  418,  422. 

1  Rev.  Stats.,  §  3220  (2  U.  S.  Comp.  Stats.,  p.  2086). 

2  Rev.  Stats.,  §2228  (2  U.  S.  Comp.  Stats.,  p.  2088). 

3  United  States  v.  Savings  Bank,   104  U.  S.  728  (with 
which  compare  Cotton  Press  Co.  v.  Collector,  1  Woods,  296). 
As  to  the  limitation  of  time  for  appealing  to  the  Commissioner, 
see  Kings  County  Sav.  Institution  v.  Blair,  116  U.  S.  200; 
6  Sup.  Ct.  Rep.  353. 


EEMEBIES.  169 

this  jurisdiction,  the  Commissioner  is  not  bound 
by  strict  or  technical  rules,  and  may  direct  re- 
mission of  a  tax  paid  without  protest.1  If  he 
decides  in  favor  of  an  applicant  and  payment  is 
nevertheless  refused  by  the  disbursing  officers  of 
the  government,  a  suit  will  lie  against  the  United 
States  in  the  Court  of  Claims  or  in  a  United  States 
Circuit  or  District  Court  to  recover  the  amount 
of  the  award.2 

1  Cheeseborough  v.   United  States,    192   U.   S.   253;    24 
Sup.  Ct.  Rep.  262. 

2  United  States  v.  Savings  Bank,  104  U.  S.  728;   Edison 
El.  111.  Co.  v.  United  States,  38  Ct.  of  Cl.  208. 


CHAPTER  VIII 

CONSTITUTIONALITY 

§  139    In  general. 

§  140    Statement  of  objections  to  constitutionality  of  the  law. 

§  141     Pollock  v.  Farmers'  Loan  and  Trust  Co. 

§§  142-144  Is  the  present  tax  a  "direct  tax"? 

§  142        Tax  on  income  from  a  particular  employment  not  a 

a  direct  tax. 

§  143         Is  the  present  tax  within  that  principle? 
§  144         A  suggested  distinction  from  the  income-tax  cases. 
§  145    Is  the  tax  invalid  as  a  federal  tax  on  a  state  franchise? 
§  146    The  objection  of  inequality. 
§  147     Constitutionality  as  applied  to  income  from  state  and 

municipal  securities. 
§  148     Retroactive  features  of  the  law. 
§  149    Consequences  of  partial  unconstitutionality. 

§  139.  In  General.  —  The  question  of  the  con- 
stitutionality of  the  tax  has  been  reserved  for 
consideration  here,  because,  although  the  con- 
stitutionality of  the  law  is  the  first  question  that 
a  lawyer  who  is  called  upon  to  consider  the  statute 
must  decide,  yet  the  question  of  constitutionality, 
in  all  its  multiform  phases,  cannot  be  thoroughly 
understood  until  the  meaning  of  the  Act  is  first 
fully  comprehended. 

As  stated  above,  it  is  a  matter  of  common  knowl- 


CONSTITUTIONALITY.  171 

edge  that  this  tax  was  proposed  in  the  Senate  as 
an  amendment -to  the  Tariff  Bill  of  1909,  as  a  sub- 
stitute for  a  pending  amendment  which  would 
have  attempted  to  levy  a  general  income  tax. 1  It 
was  believed  by  the  advocates  of  this  tax  that 
the  constitutional  objections  to  a  general  income 
tax  were  obviated  by  this  Act.  There  is,  however, 
ground  for  serious  doubt  whether  this  belief  was 
wholly  justified. 

§  140.  Statement  of  Objections  to  Constitu- 
tionality of  the  Law.  —  There  are  at  least  four 
possible  objections  that  may  be  urged  against  the 
constitutionality  of  the  Act,  or  important  parts 
of  the  Act:  — 

(1)  That  it  attempts  to  levy  a  "  direct  tax  " 
without    apportionment    between    the    states    in 
proportion  to  their  population,  as  required  by  the 
Constitution. 

(2)  That   it    amounts  to   a  tax    on   franchises 
granted  by  the  several  states,   and  is   therefore 
within  the  principle  that  the  Federal  Government 
has  no  power  to  tax  the  governmental  functions 
of  the  states. 

(3)  That   the  tax  is  unequal,  and  not  "  uni- 
form." 

(4)  That  in  so  far  as  the  Act  attempts  to  tax 
income  derived  from  state  and  municipal  securi- 
ties, it  is  unconstitutional  as  a  tax  upon  the  agen- 
cies of  the  state  governments. 

§  141.    Pollock  v.  Farmers'  Loan  &  Trust  Co.  — 
1  Supra  §1. 


172      FEDERAL  CORPORATION  TAX  LAW. 

All  of  these  objections  are  connected  with  the 
famous  case  in  which  the  Income  Tax  Law  of 
1894  was  held  unconstitutional.1  The  statute 
involved  in  that  case  purported  to  lay  a  general 
tax  on  all  incomes  both  of  individuals  and  of 
corporations.  Four  thousand  dollars  of  the  income 
of  every  individual  was  exempt;  but  no  such 
exemption  was  allowed  to  corporations.  The 
case  was  twice  argued  in  the  Supreme  Court. 
At  the  first  hearing  the  Court  held,  (1)  unani- 
mously, that  in  so  far  as  the  Act  attempted  to 
tax  income  derived  from  state  and  municipal 
securities,  it  was  a  tax  on  agencies  of  the  state 
governments,  and  as  such  was  unconstitutional, 
and  (2)  by  six  judges  to  two,  that  a  tax  on  income 
derived  from  land  is  equivalent  to  a  tax  on  the 
land  itself,  and  as  such  is  a  "  direct  tax  "  within 
the  meaning  of  the  Constitution,  and  is  therefore 
void  unless  apportioned  among  the  states.  Upon 
the  question  whether  a  tax  on  income  derived  from 
personal  property  is  a  direct  tax,  the  judges  were 
equally  divided  in  opinion;  and  were  similarly 
divided  upon  the  question  whether  the  tax  levied 
by  the  Act  of  1894  was  unconstitutional  because 
of  lack  of  equality. 

Upon  rehearing,  the  Court  unanimously  ad- 
hered to  the  ruling  that  the  Act  of  Congress,  in 
so  far  as  it  attempted  to  tax  income  from  state 

1  Pollock  v,  Farmers'  L.  &  T.  Co.,  157  U.  S.  429;  15  Sup. 
Ct.  Rep.  673;  and,  on  rehearing,  158  U.  S.  601;  15  Sup.  Ct. 
Rep.  912. 


CONSTITUTIONALITY.  1 73 

and  municipal  securities,  was  void.  The  Court, 
by  a  bare  majority  of  five  judges  to  four,  adhered 
to  the  previous  ruling  that  a  tax  on  the  income 
of  land  is  a  "  direct  tax,"  and  further  held  that 
a  tax  on  the  income  of  invested  personal  property 
of  all  descriptions  is  also  a  "  direct  tax,"  and 
therefore  unconstitutional  unless  apportioned 
among  the  states  according  to  their  population. 
A  majority  of  the  Court  was  also  of  opinion  that 
as  the  income-tax  provisions  of  the  Act  of  1894 
embraced  one  indivisible,  harmonious  system; 
and  as  they  were  unconstitutional  in  so  far  as 
they  taxed  income  from  real  estate  and  from  in- 
vested personal  property,  it  would  defeat  the 
presumable  intention  of  Congress  to  uphold  them 
in  so  far  as  they  taxed  income  derived  from  a 
business  or  employment.  For  this  reason,  all  the 
income-tax  provisions  of  the  Act  of  1894  were 
held  void.  It  thus  became  unnecessary  to  express 
any  opinion  upon  the  question,  whether  the  Act 
was  void  for  inequality.  Notwithstanding  the 
criticism  to  which  this  decision  has  been  sub- 
jected, there  is  no  reason  to  suppose  that  the 
Supreme  Court  would  overrule  it,  although  it 
might  be  rather  closely  limited. 

§  142.  Is  the  present  Tax  a  "Direct  Tax"  ?  — 
Tax  on  Income  from  a  Particular  Employment 
not  a  Direct  Tax.  —  The  law  may  be  regarded 
as  settled  that  a  tax  upon  the  income  derived 
from  a  particular  business  or  employment  is  an 
excise  tax,  and  not  a  direct  tax,  so  that  it  may  be 


174      FEDERAL  CORPORATION  TAX  LAW. 

levied  by  Congress  without  apportionment  among 
the  states  in  proportion  to  population1  No  case 
has  ever  carried  this  doctrine  to  the  extent  of 
upholding  a  general  income  tax  levied  upon  the 
income  of  all  classes  of  business,  but  not  extending 
to  income  from  invested  personal  property  and 
real  estate,  but  there  seems  no  reason  to  doubt  that 
in  a  case  presenting  the  question,  the  court  would 
carry  the  doctrine  to  that  extent.  Such  taxes 
are  not  taxes  on  property,  but  on  the  carrying  on 
of  business. 

§  143.  Is  the  Present  Tax  within  That  Prin- 
ciple? —  It  is  under  the  principle  just  stated 
that  it  is  sought  to  maintain  the  validity  of  the 
present  tax.  Attention  has  already  been  directed 
to  the  difficulty  in  holding  this  tax  to  be  what 
it  is  designated  by  Congress,  —  namely,  "  a 
special  excise  tax  with  respect  to  the  carrying 
on  or  doing  business,"  —  rather  than  what  in 
substance  it  amounts  to:  namely,  a  tax  on  income 
from  all  sources.2  Unlike  the  tax  upheld  in 
Spreckels  Sugar  Refining  Co.  v.  McClain,3  this 
tax  is  not  confined  to  receipts  from  business,  but 
expressly  includes  income  derived  from  all  other 

Spreckels  Sugar  Refining  Co.  v.  McClain,  192  U.  S. 
397;  24  Sup.  Ct.  Rep.  376;  Pacific  Ins.  Co.  v.  Soule,  7  Wall. 
433.  Cf.  Maine  v.  Grand  Trunk  Ry.  Co.,  142  U.  S  217,  227- 
228;  12  Sup.  Ct.  Rep.  121,  163;  Western  Union  Tel.  Co.  v. 
Massachusetts,  125  U.  S.  530;  8  Sup.  Ct.  Rep,  961. 

2  Supra  §  4-§  10. 

3  192  U.  S.  397. 


CONSTITUTIONALITY.  175 

sources,  including  invested  capital.1  It  would 
seem,  therefore,  difficult,  to  say  the  least,  to 
sustain  this  law  in  its  entirety  without  impinging 
upon  the  principle  of  Pollock  v.  Farmers1  Loan 
&  Trust  Co.,2  that  a  tax  upon  income  of  property 
is  a  tax  on  the  property  itself.  It  would  not,  how- 
ever, follow  that  the  tax  must,  for  this  reason,  be 
declared  wholly  unconstitutional;  3  for  the  ob- 
jections just  stated  would  affect  the  validity  of 
the  tax  only  in  so  far  as  it  relates  to  income  from 
investments. 

§  144.  A  Suggested  Distinction  from  the  In- 
come-Tax Cases.  —  It  may  be  said  that  Pollock  v. 
Farmers'  Loan  &  Trust  Co.  declared  a  tax  on 
the  income  of  all  persons  over  a  certain  amount 
to  be  a  direct  tax,  but  that  it  does  not  follow 
that  a  tax  on  the  income  of  such  persons  only  as 
are  engaged  in  certain  businesses  or  employments, 
would  be  a  direct  tax.4  If  this  argument  is  sound, 
a  general  tax  on  the  income  of  all  persons  would 
be  a  direct  tax;  but  a  tax  on  the  income  of  all 
lawyers  or  doctors,  although  not  confined  to 

1  Supra  §5,  §9. 

2  157  U.  S.  429;    158  U.  S.  601. 

3  Infra  §149. 

4  In  support  of  this  argument,  it  should  be  mentioned 
that  while  a  general  tax  on  personal  property  of  all  kinds 
was  held  in  Pollock  v.  Farmers'  L.  &  T.  Co.,  158  U.  S.  601; 
15  Sup.  Ct.  Rep.  912;   157  U.  S.  429;   15  Sup.  Ct.  Rep.  673; 
to  be  a  direct  tax,  and  not  an  excise,  yet  a  tax  on  certain 
kinds  of  personal  property  is  deemed  an  excise.    See  Patton 
v.  Brady,  184  U.  S.  608;  22  Sup.  Ct.  Rep.  493. 


176      FEDERAL  CORPORATION  TAX  LAW. 

income  derived  from  their  practice  of  those  pro- 
fessions, but  including  income  derived  from  rents 
of  real  estate,  and  invested  personal  property, 
would  be  an  excise  tax  on  engaging  in  the  pro- 
fession of  the  law  or  medicine.  When  we  remem- 
ber the  small  proportion  of  the  income  of  some 
lawyers  which  is  derived  from  the  practice  of 
their  profession,  we  can  appreciate  the  length 
to  which  the  supporters  of  this  argument  must 
be  prepared  to  go.  But  suffice  it  to  say  that  if 
this  argument  is  sound,  all  objection  to  the  present 
tax,  on  the  score  of  its  being  a  direct  tax  levied 
without  apportionment,  is  removed. 

§  145.  Is  the  Tax  Invalid  as  a  Federal  Tax  on 
a  State  Franchise?  —  It  has  been  stated  above 
that  this  tax  is  not  levied  upon  any  corporate 
franchise  or  franchises;  for  the  simple  reason 
that  unincorporated  joint  stock  companies  are 
taxed  equally  with  corporations.1  For  this  reason 
the  objection  that  the  tax  is  a  federal  tax  on 
franchises  granted  by  the  states,  and  as  such  is 
unconstitutional,  falls  to  the  ground. 

But  apart  from  this  simple  answer  to  the  objec- 
tion, it  may  be  doubted  whether  a  federal  tax  on 
the  right  or  franchise  to  exist  as  a  corporation 
under  state  laws  would  be  unconstitutional,2 
unless  the  corporation  were  formed  as  a  govern- 
mental agency  of  the  state.  It  may  be  true  that 
a  state  cannot  tax  a  franchise  of  any  kind  granted 

1  Supra  §11. 

2  Veazie  Bank  v.  Fenno,  8  Wall.  533,  547. 


CONSTITUTIONALITY.  J77 

by  the  United  States;  l  but  this  is  not  merely 
because  the  franchise  is  a  governmental  agency 
of  the  United  States  within  the  doctrine  of  Mc- 
Culloch  v.  Maryland,2  but  because  of  the  suprem- 
acy of  federal  laws.  Thus  a  state  is  without  power 
to  tax  a  patent  right,3  not  because  patents  are 
agencies  of  the  federal  government,  but  because  a 
valid  federal  law  gives  the  patentee  the  right  to 
exclusive  use  of  his  invention,  and  a  state  law 
forbidding  him  to  enjoy  that  right,  except  upon 
the  condition  of  paying  a  tax  to  the  state,  is  in 
conflict  with  the  federal  law,  and  must  therefore 
yield  to  the  law  of  superior  force. 

For  this  reason,  decisions  holding  that  a  state 
cannot  tax  a  corporate  franchise  granted  by  the 
United  States,  are  not  authority  for  the  proposition 
that  the  United  States  could  not  tax  similar  fran- 
chises granted  by  a  state.  Moreover,  Congress  has 
no  power  to  create  corporations  within  the  states, 
except  as  a  means  of  carrying  out  its  governmental 
powers,  so  that  every  corporate  franchise  granted 
by  the  United  States  is  necessarily  a  governmental 
agency  of  the  United  States.  A  state,  on  the 
other  hand,  has  power  to  allow  incorporation  for 
any  lawful  purpose,  —  even  a  merely  private 
purpose,  —  and  to  abrogate  the  common  law  rule 

Central  Pac.  R.  R.  Co.  v.  California,  162  U.  S.  91;  16 
Sup.  Ct.  Rep.  766;  California  v.  Central'  Pac.  R.  R.  Co.,  127 
U.  S.  1,  41;  8  Sup.  Ct.  Rep.  1073. 

2  4  Wheat.  316. 

3  Re  Sheffield,  64  Fed.  833. 


178      FEDERAL  CORPORATION  TAX  LAW. 

which  prohibited  the  formation  of  corporations 
without  a  license  from  the  Crown,  so  that  state 
corporations  are  not  necessarily  governmental 
agencies.  If  a  state  corporation  were  created  as 
a  means  of  exercising  some  governmental  power, 
—  for  example,  as  a  means  of  regulating  the  liquor 
traffic,  —  a  very  different  question  would  be 
presented. l 

§  146.  The  Objection  of  Inequality.  —  If  the 
present  tax  is  an  excise,  rather  than  a  direct  tax, 
it  is  within  the  constitutional  requirement,  that 
"  all  duties,  imposts,  and  excises  shall  be  uniform 
throughout  the  United  States  ";  but  it  is  now  well 
settled  that  this  provision,  in  accordance  with 
the  natural  meaning  of  the  words,  has  exclusive 
reference  to  geographical  uniformity.2  The  power 
to  levy  excise  taxes  is,  however,  restricted  by  the 
provision  of  the  Fifth  Amendment,  that  no  person 
shall  be  deprived  of  life,  liberty  or  property  with- 
out due  process  of  law.  Moreover,  a  certain 
amount  of  equality  may  be  inherent  in  the  power 
of  taxation  as  distinguished  from  arbitrary  ex- 
actions and  confiscation. 

Now  the  present  tax  will  undoubtedly  cause  a 
certain  amount  of  inequality.  In  the  first  place, 

1  Apparently,    however,    the   power   of   federal   taxation 
would  extend  even  to  such  cases:   South  Carolina  v.  United 
States,  199  U.  S.  437;  26  Sup.  Ct.  Rep.  110. 

2  Patton  v.  Brady,  184  U.  S.  608,  622-623;  22  Sup.  Ct.  Rep. 
493;  Knowlton  v.  Moore,  178  U.  S.  41,  106;  20  Sup.  Ct.  Rep. 
747;    Head-Money  Cases,  112  U.  S.  580,  594;    5   Sup.  Ct. 
Rep.  247. 


CONSTITUTIONALITY.  179 

it  is  levied  only  on  companies  having  a  share 
capital,  and  insurance  companies.  It  discrim- 
inates against  such  companies,  and  the  economic 
wisdom  is,  therefore,  in  the  writer's  judgment, 
more  than  questionable;  but  such  a  consideration 
is  for  the  legislature,  rather  than  the  courts.  The 
judiciary  can  hardly  say  that  the  discrimination 
is  so  gross  and  arbitrary  as  to  convert  the  exaction 
into  mere  confiscation,  and  to  destroy  its  char- 
acter as  a  tax.1 

In  the  Income  Tax  Cases,  great  stress  was  laid 
by  the  appellants  on  the  fact  that  the  statute 
exempted  incomes  of  less  than  four  thousand 
dollars,  and  was  thus  unequal  in  its  operation, 
and  this  argument  seems  to  have  commanded  the 
assent  of  four  judges.  But  no  reliance  can  be 
placed  upon  the  similar  exemption  in  the  present 
Act  as  affecting  its  validity;  for  the  Supreme 
Court  has  sustained  a  statute  which  laid  an  excise 
tax  on  incomes  from  certain  businesses  in  excess 
of  two  hundred  and  fifty  thousand  dollars  a  year,2 
and  has  upheld  taxes  laid  according  to  a  progress- 
ive rate.3 

There  are  many  other  striking  inequalities  pos- 
sible under  the  present  law,  which  have  already 

1  Cf.  McCrary  v.  United  States,  195  U.   S.  27;    24   Sup. 
Ct.  Rep.  769. 

2  Spreckels  Sugar  Refining  Co.  v.  McClain,  192  U.  S.  397; 
24  Sup.  Ct.  Rep.  376. 

3  Knowlton  v.  Moore,  178  U.  S.  41,  109;  20  Sup.  Ct.  Rep. 
747;    Magoun  v.  Illinois  Trust  etc.  Co.,  170  U.  S.  283,  293; 
18  Sup.  Ct.  Rep.  594. 


180      FEDERAL  CORPORATION  TAX  LAW. 

been  adverted  to;  but  probably  none  of  them 
can  be  relied  upon  with  any  degree  of  confidence 
to  impair  the  constitutionality  of  the  statute. 
If,  indeed,  the  Act  should  be  construed  to  lay 
the  tax  on  incomes  received  by  corporations  as 
trustees,1  then  truly  the  inequalities  might  well 
be  held  to  be  so  great  and  glaring  as  to  amount 
to  a  taking  of  property  without  due  process  of 
law.  Even  if  the  Act  shall  be  so  construed  as 
to  avoid  that  injustice,  nevertheless  it  would  seem 
to  be  liable  to  every  objection  on  the  score  of 
inequality  which  was  urged  against  the  Income 
Tax  Law  of  1894,  and,  so  far  at  least  as  four  of 
the  eight  judges  who  participated  in  the  first 
hearing,  urged  successfully. 

§  147.  As  to  Income  from  State  and  Municipal 
Securities.  —  As  explained  above,  the  objections 
to  the  validity  of  this  tax,  so  far  as  it  applies  to 
income  received  by  corporations  from  state  and 
municipal  securities,  would  seem  to  be,  to  say  the 
least,  very  formidable.2  Congress  is  wholly 
without  power  to  tax  such  securities,  either 
directly  or  indirectly;  and  the  tax  in  the  present 
case  is,  it  is  submitted,  if  not  a  direct  tax,  at 
least  an  indirect  one  upon  the  income  from  such 
securities. 

§  148.  Retroactive  Features.  —  It  is  no  ob- 
jection to  the  validity  of  the  law  that  it  attempts 


1  As  to  this,  see  supra  §  38. 

2  Supra  §40. 


CONSTITUTIONALITY.  181 

to  tax  income  earned  before  its  passage.1  There 
is,  however,  some  doubt  whether  it  should  be 
construed  as  having  that  effect.2 

§  149.  Consequences  of  Partial  Unconstitu- 
tionality.  —  Even  if  the  tax  sought  to  be  imposed 
by  this  Act  should  be  held  to  be  unconstitutional 
in  part,  it  would  not  necessarily  follow  that  the 
whole  should  fall.  The  rule  in  such  cases  of  partial 
unconstitutionality  is  simple  enough,  although 
often  difficult  of  application:  If  the  unconstitu- 
tional parts  of  the  Act  form  so  important  a  part 
of  the  whole,  and  are  so  intimately  connected 
with  the  rest  that  it  cannot  be  assumed  that  the 
legislature  would  have  enacted  the  remaining 
provisions  if  it  had  been  informed  of  the  un- 
constitutionality of  the  others,  then  the  courts  will 
declare  the  whole  inoperative;  but  if,  on  the  other 
hand,  the  unconstitutional  features  are  separable 
from  the  rest,  and  if  there  is  no  reason  to  doubt 
that  the  legislature  would  have  wished  the  law  to 
be  carried  out  so  far  as  can  constitutionally  be 
done,  then  the  courts  will  not  declare  the  whole 
act  inoperative,  but  will  enforce  its  provisions  so  far 
as  they  may  be  constitutional. 

Now,  applying  these  rules  to  the  present  case, 
we  cannot  doubt  that  the  mere  inability  of  Con- 
gress to  tax  so  much  of  the  income  of  companies 
subject  to  the  Act  as  may  be  derived  from  state 

1  Schuylkill  Nav.  Co.  v.  Elliott,  21  Fed.  Cas.  762;  Stock- 
dale  v.  Insurance  Cos.,  20  Wall.  323,  331. 
,   2  See  supra  §  39. 


182      FEDERAL  CORPORATION  TAX  LAW. 

and  municipal  securities,  is  no  reason  why  the 
tax  should  not  be  enforced  as  to  income  derived 
from  other  sources.  Of  course,  if  the  tax  should 
be  held  to  be  a  tax  upon  state  franchises,  and  there- 
fore to  be  unconstitutional  as  a  tax  on  the  agencies 
of  the  state,  or  if  it  should  be  held  to  be  so  un- 
equal in  its  operation  as  to  amount  to  a  taking 
of  property  without  due  process  of  law,  it  would 
be  wholly  void;  but  if  those  contingencies  be  passed 
by  as  too  remote,  the  most  radical  view  possible 
would  be  that  the  law  is  unconstitutional  so  far 
as  it  attempts  to  tax  income  from  investments 
in  real  and  personal  property.  Even  then,  there 
would  seem  to  be  no  reason  why  the  Act  should  not 
be  held  operative  as  to  income  from  the  carrying  on 
of  business.  It  is  true  that  in  Pollock  v.  Farm- 
ers' Loan  &  Trust  Co.,1  the  Supreme  Court  held, 
though  not  without  dissent,  that  a  tax  levied  on  all 
incomes  would  not  be  held  operative  as  to  such  in- 
come as  was  derived  from  business  or  employ- 
ments, but,  being  invalid  as  to  income  from  real 
estate  and  from  invested  personal  property,  should 
be  declared  void  altogether.  But  this  decision  is 
not  in  point  in  this  respect,  for  the  present  tax 
is  expressly  laid  "  with  respect  to  the  carrying 
on  or  doing  business,"  and  even  if  those  words 
should  not  be  held  sufficient,  in  view  of  the  express 
language  of  other  parts  of  the  Act,  to  justify 
the  courts  in  declaring  that  the  tax  is  laid  exclu- 
sively on  the  business  of  companies  subject  to 
1 158  U.  S.  601,  635-637;  15  Sup.  Ct.  Rep.  912. 


CONSTITUTIONALITY.  183 

the  tax,  and  not  upon  their  property  as  well 
as  business,  yet  at  least  the  words  quoted  do 
show  that  the  taxing  of  the  business  was  the  chief 
object  which  Congress  had  in  view.  And  as  that 
chief  object  can  be  constitutionally  carried  out, 
there  is  no  reason  for  declaring  the  whole  Act 
to  be  void  because  some  of  the  minor  provisions, 
such  as  that  for  taxing  income  from  invested  capital, 
may  be  unconstitutional. 


APPENDIX  I 

TEXT  OF  THE  ACT  OF  CONGRESS 

Reprinted   from   U.   S.   Stats.,   61st  Cong.,    1st 
i.,  pp.  11,  112-117,  118. 


CHAP.  6.  An  act  to  provide  revenue,  equalize 
duties  and  encourage  the  industries  of  the  United 
States,  and  for  other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of  Repre- 
sentatives of  the  United  States  of  America  in  Congress 
Assembled, 

•        •••••••• 

{Paragraph  One] 

1  SEC.    38.1     That   every   corporation,    joint 

2  stock   company  or  association,   organized  for 

3  profit  and  having  a  capital  stock  represented 

4  by  shares,  and  every  insurance  company,  now 

5  or  hereafter  organized  under  the  laws  of  the 

6  United  States  or  of  any  State  or  Territory  of 

7  the  United  States  or  under  the  acts  of  Congress 

8  applicable  to  Alaska  or  the  District  of  Columbia, 

*The  first  paragraph  of  this  section  is  not  numbered,  as 
the  succeeding  paragraphs  are.  It  should  be  read,  however, 
as  Paragraph  I,  and  is  so  cited  in  this  book. 


186      FEDERAL  CORPORATION-  TAX  LAW. 

9  or  now  or  hereafter  organized  under  the  laws 

10  of  any  foreign  country  and  engaged  in  business 

11  in  any  State  or  Territory  of  the  United  States 

12  or  in  Alaska  or  in  the  District  of  Columbia, 

13  shall   be   subject   to   pay   annually    a   special 

14  excise  tax  with  respect  to  the  carrying  on  or 

15  doing  business  by  such  corporation,  joint  stock 

16  company  or  association,  or  insurance  company, 

17  equivalent  to  one  per  centum  upon  the  entire 

18  net  income  over  and  above  five  thousand  dollars 

19  received  by  it  from  all  sources   during  such 

20  year,  exclusive  of  amounts  received  by  it  as 

21  dividends   upon  stock  of  other   corporations, 

22  joint  stock  companies   or   associations,  or  in- 

23  surance  companies,  subject  to  the  tax  hereby 

24  imposed;    or  if  organized  under  the  laws  of 

25  any  foreign  country,  upon  the  amount  of  net 

26  income  over  and  above  five  thousand  dollars 

27  received  by  it  from  business  transacted  and 

28  capital  invested  within  the  United  States  and 

29  its   Territories,    Alaska,    and   the   District   of 

30  Columbia    during    such    year,     exclusive    of 

31  amounts  so  received  by  it  as  dividends  upon 

32  stock  of  other  corporations,  joint  stock  com- 

33  panics  or  associations,  or  insurance  companies, 

34  subject  to  the  tax  hereby  imposed:    Provided, 

35  however,  That  nothing  in  this  section  contained 

36  shall  apply  to  labor,  agricultural  or  horticul- 

37  tural  organizations,  or  to  fraternal  beneficiary 

38  societies,     orders,     or    associations    operating 

39  under   the  lodge  system,    and   providing  for 


APPENDIX  I.  187 

40  the  payment  of  life,  sick,  accident,  and  other 

41  benefits    to    the   members    of    such    societies, 

42  orders,  or  associations,  and  dependents  of  such 

43  members,  nor  to  domestic  building   and  loan 

44  associations,  organized  and  operated  exclusively 

45  for  the  mutual  benefit  of  their  members,  nor 

46  to   any   corporation   or   association    organized 

47  and  operated  exclusively  for  religious,   chari- 

48  table,    or    educational    purposes,    no    part   of 

49  the  net  income  of  which  inures  to  the  benefit 

50  of  any  private  stockholder  or  individual. 

^Paragraph  Two] 

1  SECOND.   Such  net  income  shall  be  ascertained 

2  by  deducting  from  the  gross  amount  of  the 

3  income  of  such  corporation,  joint  stock  com- 

4  pany   or   association,   or   insurance   company, 

5  received    within    the   year    from    all    sources, 

6  (first)  all  the  ordinary  and  necessary  expenses 

7  actually  paid  within  the  year  out  of  income 

8  in  the  maintenance  and  operation  of  its  busi- 

9  ness  and  properties,  including  all  charges  such 

10  as  rentals  or  franchise  payments,  required  to 

11  be  made  as  a  condition  to  the  continued  use 

12  or  possession  of  property;    (second)   all  losses 

13  actually  sustained   within   the   year    and  not 

14  compensated   by   insurance   or   otherwise,   in- 

15  eluding  a  reasonable  allowance  for   deprecia- 

16  tion  of  property,  if  any,  and  in  the   case  of 

17  insurance    companies    the    sums    other    than 

18  dividends,    paid   within   the   year   on    policy 


188  FEDEKAL   CORPORATION   TAX  LAW. 

19  and  annuity  contracts  and  the  net  addition, 

20  if  any,  required  by  law  to  be  made  within  the 

21  year  to  reserve  funds;   (third)  interest  actually 

22  paid  within  the  year  on  its  bonded  or  other 

23  indebtedness   to   an   amount  of  such  bonded 

24  and    other    indebtedness    not    exceeding    the 

25  paid-up   capital    stock    of    such    corporation, 

26  joint    stock    company    or    association,    or    in- 

27  surance    company,    outstanding    at   the   close 

28  of  the  year,  and  in  the  case  of  a  bank,  banking 

29  association,    or    trust    company,    all    interest 

30  actually  paid  by  it  within  the  year  on  deposits; 

31  (fourth)   all  sums  paid  by  it  within  the  year 

32  for  taxes  imposed  under  the  authority  of  the 

33  United  States   or  of  any  State  or  Territory 

34  thereof,    or    imposed    by    the   government   of 

35  any  foreign  country  as  a  condition  to  carrying 

36  on  business  therein;     (fifth)   all  amounts  re- 

37  ceived   by   it   within   the   year   as    dividends 

38  upon  stock  of  other  corporations,  joint  stock 

39  companies  or  associations,  or  insurance  com- 

40  panies,    subject   to   the   tax   hereby  imposed: 

41  Provided,  That  in  the  case  of  a  corporation, 

42  joint  stock  company  or  association,  or  insur- 

43  ance  company,   organized  under  the  laws  of 

44  a  foreign  country,  such  net  income  shall   be 

45  ascertained    by    deducting    from    the    gross 

46  amount    of    its    income    received    within    the 

47  year    from    business    transacted    and    capital 

48  invested   within   the   United   States    and   any 

49  of  its  Territories,  Alaska,  and  the  District  of 


APPENDIX  I.  189 

50  Columbia,  (first)  all  the  ordinary  and  necessary 

51  expenses   actually  paid   within   the  year  out 

52  of  earnings  in  the  maintenance  and  operation 

53  of  its  business  and  property  within  the  United 

54  States    and   its   Territories,    Alaska,    and   the 

55  District   of    Columbia,    including    all    charges 

56  such  as  rentals  or  franchise  payments  required 

57  to  be  made  as  a  condition  to  the  continued 

58  use   or   possession    of   property;    (second)   all 

59  losses   actually  sustained  within  the  year  in 

60  business   conducted  by  it  within  the  United 

61  States  or  its  Territories,  Alaska,  or  the  Dis- 

62  trict    of    Columbia   not   compensated   by   in- 

63  surance  or  otherwise,  including  a  reasonable 

64  allowance    for    depreciation    of    property,    if 

65  any,  and  in  the  case  of  insurance  companies 

66  the  sums  other  than  dividends,   paid  within 

67  the    year    on    policy    and    annuity    contracts 

68  and  the  net  addition,  if  any,  required  by  law 

69  to  be  made  within  the  year  to  reserve  funds; 

70  (third)  interest  actually  paid  within  the  year 

71  on  its   bonded   or  other  indebtedness   to   an 

72  amount  of  such  bonded  and  other  indebtedness, 

73  not  exceeding  the  proportion  of  its  paid-up 

74  capital  stock  outstanding  at  the  close  of  'the 

75  year  which  the  gross   amount  of  its  income 

76  for   the   year   from   business    transacted    and 

77  capital    invested    within    the    United    States 

78  and   any  of  its  Territories,   Alaska,    and  the 

79  District  of  Columbia  bears  to  the  gross  amount 

80  of  its  income  derived  from  all  sources  within 


190  FEDERAL   CORPORATION  TAX  LAW. 

81  and  without  the  United   States;    (fourth)  the 

82  sums  paid  by  it  within   the   year   for    taxes 

83  imposed  under  the   authority  of   the   United 

84  States  or  of  any  State  or  Territory  thereof; 

85  (fifth)  all  amounts  received  by  it  within  the 

86  year  as  dividends  upon  stock  of  other  corpora- 

87  tions,   joint  stock  companies   or   associations, 

88  and    insurance    companies,     subject    to    the 

89  tax  hereby  imposed.    In  the  case  of  assessment 

90  insurance    companies    the    actual    deposit    of 

91  sums   with  State  or  Territorial  officers,   pur- 

92  suant   to   law,    as   additions   to   guaranty   or 

93  reserve  funds  shall  be  treated  as  being  pay- 

94  ments  required  by  law  to  reserve  funds. 

[Paragraph  Three] 

1  THIRD.     There  shall  be  deducted  from  the 

2  amount  of  the  net  income  of  each  of  such 

3  corporations,  joint  stock  companies  or  associa- 

4  tions,  or  insurance  companies,  ascertained  as 

5  provided  in  the  foregoing  paragraphs   of   this 

6  section,  the  sum  of  five  thousand  dollars,  and 

7  said  tax  shall  be  computed  upon  the  remainder 

8  of  said  net  income  of  such  corporation,  joint 

9  stock  company  or  association,  or  insurance  com- 

10  pany,  for  the  year  ending  December  thirty-first, 

11  nineteen  hundred  and  nine,  and  for  each  calen- 

12  dar  year  thereafter;  and  on  or  before  the  first 

13  day  of  March,  nineteen  hundred  and  ten,  and 

14  the  first  day  of  March  in  each  year  thereafter,  a 

15  true  and  accurate  return  under  oath  or  affirma- 


APPENDIX  I.  191 

16  tion  of  its  president,  vice-president,  or  other 

17  principal  officer,  and  its  treasurer  or  assistant 

18  treasurer,  shall  be  made  by  each  of  the  cor- 

19  porations,   joint  stock   companies   or  associa- 

20  tions,    and   insurance   companies,    subject   to 

21  the  tax  imposed  by  this  section,  to  the  collector 

22  of  internal  revenue  for  the  district  in  which 

23  such    corporation,    joint    stock    company    or 

24  association,    or    insurance    company    has    its 

25  principal  place  of  business,  or,  in  the  case  of 

26  a  corporation,  joint  stock  company  or  associa- 

27  tion,  or  insurance  company,  organized  under 

28  the  laws  of  a  foreign  country,  in  the  place 

29  where  its  principal  business  is  carried  on  within 

30  the  United  States,  in  such  form  as  the  Com- 

31  missioner    of    Internal    Revenue,     with    the 

32  approval   of   the   Secretary   of   the   Treasury, 

33  shall  prescribe,  setting  forth  (first)  the  total 

34  amount  of  the  paid-up  capital  stock  of  such 

35  corporation,  joint  stock  company  or  associa- 

36  tion,    or   insurance   company,    outstanding   at 

37  the  close  o»f  the  year;  (second)  the  total  amount 

38  of  the  bonded  and  other  indebtedness  of  such 

39  corporation,  joint  stock  company  or  association, 

40  or  insurance  company  at  the  close  of  the  year; 

41  (third)   the  gross   amount  of  the  income  of 

42  such    corporation,    joint    stock    company    or 

43  association,    or   insurance   company,    received 

44  during   such   year   from    all   sources,    and   if 

45  organized  under  the  laws  of  a  foreign  country 

46  the  gross  amount  of  its  income  received  within 


192  FEDERAL   CORPORATION  TAX  LAW. 

47  the  year  from  business  transacted  and  capital 

48  invested  within  the  United  States  and  any  of 

49  its    Territories,    Alaska,    and    the    District   of 

50  Columbia;    also  the  amount  received  by  such 

51  corporation,  joint  stock  company  or  association, 

52  or   insurance   company,    within   the   year   by 

53  way  of  dividends  upon  stock  of  other  corpora- 

54  tions,  joint  stock  companies  or  associations,  or 

55  insurance  companies,  subject  to  the  tax  im- 

56  posed    by    this    section;     (fourth)    the    total 

57  amount    of    all    the    ordinary    and    necessary 

58  expenses  actually  paid  out  of  earnings  in  the 

59  maintenance    and   operation    of   the  business 

60  and    properties    of     such     corporation,    joint 

61  stock    company   or   association,    or   insurance 

62  company,  within  the  year,  stating  separately 

63  all  charges  such  as  rentals  or  franchise  pay- 

64  ments  required  to  be  made  as  a  condition  to 

65  the  continued  use  or  possession  of  property, 

66  and  if  organized  under  the  laws  of  a  foreign 

67  country  the  amount  so  paid  in  the  maintenance 

68  and  operation  of  its  business  within  the  United 

69  States    and   its   Territories,    Alaska,    and   the 

70  District  of  Columbia;    (fifth)  the  total  amount 

71  of    all    losses    actually    sustained    during    the 

72  year   and  not   compensated   by  insurance  or 

73  otherwise,  stating  separately  any  amounts  al- 

74  lowed  for  depreciation  of  property,  and  in  the 

75  case  of  insurance  companies  the  sums  other 

76  than  dividends,  paid  within  the  year  on  policy 

77  and  annuity  contracts  and  the  net  addition, 


APPENDIX  I.  193 

78  if  any,  required  by  law  to  be  made  within  the 

79  year  to  reserve  funds;    and  in  the  case  of  a 

80  corporation,  joint  stock  company  or  associa- 

81  tion,  or  insurance  company,  organized  under  the 

82  laws  of  a  foreign  country,  all  losses   actually 

83  sustained  by   it   during  the  year  in  business 

84  conducted  by  it  within  the  United  States  or  its 

85  Territories,  Alaska,  and  the  District  of  Colum- 

86  bia,  not  compensated  by  insurance  or  other  wise, 

87  stating  separately  any  amounts  allowed  for  de- 

88  preciation  of  property,  and  in  the  case  of  insur- 

89  ance  companies  the  sums  other  than  dividends, 

90  paid  within  the  year  on  policy  and  annuity 

91  contracts  and  the  net  addition,  if  any,  required 

92  by  law  to  be  made  within  the  year  to  reserve 

93  fund;    (sixth)  the  amount  of  interest  actually 

94  paid  within  the  year  on  its  bonded  or  other 

95  indebtedness   to   an   amount  of  such  bonded 

96  and    other    indebtedness    not    exceeding    the 

97  paid-up    capital    stock    of    such    corporation, 

98  joint  stock  company  or  association,  or  insur- 

99  ance   company,    outstanding   at   the   close   of 

100  the  year,  and  in  the  case  of  a  bank,  banking 

101  association,   or  trust  company,   stating  sepa- 

102  rately  all  interest  paid  by  it  within  the  year 

103  on  deposits;   or  in  case  of  a  corporation,  joint 

104  stock    company   or   association,    or   insurance 

105  company,  organized  under  the  laws  of  a  foreign 

106  country,   interest   so   paid   on   its   bonded   or 

107  other    indebtedness    to    an    amount    of    such 

108  bonded  and  other  indebtedness  not  exceeding 


194  FEDERAL   CORPORATION  TAX  LAW. 

109  the   proportion   of   its   paid-up   capital   stock 

110  outstanding  at  the  close  of  the  year,  which 

111  the  gross  amount  of  its  income  for  the  year 

112  from  business  transacted  and  capital  invested 

113  within  the  United  States  and  any  of  its  Terri- 

114  tories,  Alaska,   and  the  District  of  Columbia, 

115  bears  to  the  gross  amount  of  its  income  derived 

116  from  all  sources  within  and  without  the  United 

117  States;  (seventh)  the  amount  paid  by  it  within 

118  the  year  for  taxes  imposed  under  the  authority 

119  of  the  United  States  or  any  State  or  Territory 

120  thereof,   and  separately  the  amount  so  paid 

121  by  it  for  taxes  imposed  by  the  government 

122  of  any  foreign  country  as  a  condition  to  carry- 

123  ing    on    business    therein;     (eighth)    the    net 

124  income  of  such  corporation,  joint  stock  com- 

125  pany   or   association,   or  insurance   company, 

126  after  making  the  deductions  in  this  section 

127  authorized.    All  such  returns  shall  as  received 

128  be  transmitted  forthwith  by  the  collector  to 

129  the  Commissioner  of  Internal  Revenue. 

[Paragraph  Four] 

1  FOURTH.     Whenever  evidence  shall  be  pro- 

2  duced   before    the   Commissioner   of    Internal 

3  Revenue  which  in  the  opinion  of  the  commis- 

4  sioner  justifies  the  belief  that  the  return  made 

5  by  any  corporation,  joint  stock  company  or 

6  association,   or  insurance  company,   is   incor- 

7  rect,  or  whenever  any  collector  shall  report 

8  to    the    Commissioner    of    Internal    Revenue 


APPENDIX  I.  195 

9  that  any  corporation,  joint  stock  company  or 

10  association,  or  insurance  company  has  failed 

11  to  make  a  return  as  required  by  law,  the  Com- 

12  missioner   of   Internal   Revenue   may   require 

13  from  the  corporation,  joint  stock  company  or 

14  association,    or    insurance    company    making 

15  such   return,    such   further   information    with 

16  reference   to   its   capital,   income,   losses,   and 

17  expenditures  as  he  may  deem  expedient;    and 

18  the   Commissioner   of   Internal   Revenue,    for 

19  the  purpose  of  ascertaining  the  correctness  of 

20  such  return  or  for  the  purpose  of  making  a 

21  return  where  none  has  been  made,  is  hereby 

22  authorized,  by  any  regularly  appointed  revenue 

23  agent   specially   designated   by   him   for   that 

24  purpose,   to   examine  any  books   and  papers 

25  bearing  upon  the  matters  required  to  be  in- 

26  eluded  in  the  return  of  such  corporation,  joint 

27  stock   company   or   association,    or   insurance 

28  company,   and  to   require  the  attendance  of 

29  any  officer  or  employee  of  such  corporation, 

30  joint  stock  company  or  association,  or  insur- 

31  ance    company,    and    to    take    his    testimony 

32  with  reference  to  the  matter  required  by  law 

33  to  be  included  in  such  return,  with  power  to 

34  administer  oaths  to  such  person  or  persons; 

35  and   the   Commissioner   of   Internal    Revenue 

36  may  also  invoke  the  aid  of  any  court  of  the 

37  United   States   having  jurisdiction  to  require 

38  the  attendance  of  such  officers  or  employees 

39  and  the  production  of  such  books  and  papers. 


196  FEDERAL  CORPORATION  TAX  LAW. 

40  Upon  the  information  so  acquired  the  Com- 

41  missioner   of    Internal    Revenue    may  amend 

42  any  return  or  make  a  return  where  none  has 

43  been   made.      All   proceedings    taken   by   the 

44  Commissioner  of  Internal  Revenue  under  the 

45  provisions  of  this  section  shall  be  subject  to 

46  the  approval  of  the  Secretary  of  the  Treasury. 

[Paragraph  Five] 

1  FIFTH.     All  returns  shall  be  retained  by  the 

2  Commissioner  of  Internal  Revenue  who  shall 

3  make   assessments   thereon;     and   in    case   of 

4  any  return  made  with  false  or  fraudulent  intent, 

5  he  shall  add  one  hundred  per  centum  of  such 

6  tax,  and  in  case  of  a  refusal  or  neglect  to  make 

7  a  return  or  to  verify  the  same  as  aforesaid  he 

8  shall  add  fifty  per  centum  of  such  tax.     In 

9  case  of  neglect  occasioned  by  the  sickness  or 

10  absence  of  an  officer  of  such  corporation,  joint 

11  stock   company   or   association,    or   insurance 

12  company,  required  to  make  said  return,  or  for 

13  other  sufficient  reason,  the  collector  may  allow 

14  such  further  time  for  making  and  delivering 

15  such  return  as  he  may  deem  necessary,  not 

16  exceeding  thirty  days.    The  amount  so  added 

17  to  the  tax  shall  be  collected  at  the  same  time 

18  and  in  the  same  manner  as  the  tax  originally 

19  assessed,  unless  the  refusal,  neglect,  or  falsity 

20  is  discovered  after  the  date  for  payment  of 

21  said  taxes,  in  which  case  the  amount  so  added 

22  shall  be  paid  by  the  delinquent  corporation, 


APPENDIX  I.  197 

23  joint  stock  company  or  association,  or  insur- 

24  ance  company,  immediately  upon  notice  given 

25  by  the  collector.    All  assessments  shall  be  made 

26  and  the  several  corporations,  joint  stock  com- 

27  panies  or  associations,  or  insurance  companies, 

28  shall  be  notified  of  the  amount  for  which  they 

29  are  respectively  liable  on  or  before  the  first 

30  day  of  June  of  each  successive  year,  and  said 

31  assessments  shall   be  paid  on   or  before  the 

32  thirtieth  day  of  June,  except  in  cases  of  refusal 

33  or  neglect  to  make  such  return,  and  in  cases 

34  of  false  or  fraudulent  returns,  in  which  cases 

35  the  Commissioner  of  Internal  Revenue  shall, 

36  upon  the  discovery  thereof,  at  any  time  within 

37  three  years  after  said  return  is  due,  make  a 

38  return   upon   information   obtained   as   above 

39  provided   for,    and   the   assessment   made   by 

40  the  Commissioner  of  Internal  Revenue  thereon 

41  shall  be  paid  by  such  corporation,  joint  stock 

42  company  or  association,  or  insurance  company 

43  immediately  upon  notification  of  the  amount 

44  of  such  assessment;    and  to  any  sum  or  sums 

45  due   and   unpaid   after   the   thirtieth   day   of 

46  June  in  any  year,  and  for  ten  days  after  notice 

47  and  demand  thereof  by  the  collector,   there 

48  shall  be  added  the  sum  of  five  per  centum  on 

49  the  amount  of  tax  unpaid  and  interest  at  the 

50  rate  of  one  per  centum  per  month  upon  said 

51  tax  from  the  time  the  same  becomes  due. 


198      FEDERAL  CORPORATION  TAX  LAW. 

[Paragraph  Six] 

1  SIXTH.    When  the  assessment  shall  be  made, 

2  as  provided  in  this  section,  the  returns,  to- 

3  gether  with  any  corrections  thereof  which  may 

4  have  been  made  by  the  commissioner,  shall 

5  be  filed  in  the  office  of  the  Commissioner  of 

6  Internal  Revenue  and  shall  constitute  public 

7  records  and  be  open  to  inspection  as  such. 

[Paragraph  Seven] 

1  SEVENTH.    It  shall  be  unlawful  for  any  col- 

2  lector,  deputy  collector,  agent,  clerk,  or  other 

3  officer  or  employee  of  the  United  States  to 

4  divulge  or  make  known  in  any  manner  what- 

5  ever  not  provided  by  law  to  any  person  any 

6  information  obtained  by  him  in  the  discharge 

7  of   his  official   duty,   or  to   divulge  or  make 

8  known  in  any  manner  not  provided  by  law 

9  any   document   received,    evidence   taken,    or 

10  report  made  under  this  section  except  upon  the 

11  special  direction  of   the  President;    and  any 

12  offense  against  the   foregoing  provision   shall 

13  be  a  misdemeanor  and  be  punished  by  a  fine 

14  not  exceeding  one  thousand  dollars,  or  by  im- 

15  prisonment  not  exceeding  one  year,  or  both, 

16  at  the  discretion  of  the  court. 

[Paragraph  Eight] 

1  EIGHTH.     If  any  of  the  corporations,  joint 

2  stock  companies  or  associations,  or  insurance 


APPENDIX  I.  199 

3  companies   aforesaid,   shall   refuse   or   neglect 

4  to  make  a  return  at  the  time  or  times  herein- 

5  before  specified  in  each  year,  or  shall  render  a 

6  false  or   fraudulent  return,  such  corporation, 

7  joint  stock  company  or  association,  or  insur- 

8  ance  company,  shall  be  liable  to  a  penalty  of 

9  not  less   than  one  thousand  dollars   and  not 

10  exceeding  ten  thousand  dollars. 

11  Any   person   authorized   by   law   to    make, 

12  render,  sign,  or  verify  any  return  who  makes 

13  any  false  or  fraudulent  return,  or  statement, 

14  with  intent  to  defeat  or  evade  the  assessment 

15  required  by  this  section  to  be  made,  shall  be 

16  guilty  of   a   misdemeanor,  and  shall  be  fined 

17  not    exceeding    one    thousand    dollars    or    be 

18  imprisoned  not  exceeding  one  year,  or  both, 

19  at  the  discretion  of  the  court,  with  the  costs  of 

20  prosecution. 

21  All  laws  relating  to  the  collection,  remission, 

22  and  refund  of  internal-revenue  taxes,   so  far 

23  as  applicable  to  and  not  inconsistent  with  the 

24  provisions  of  this  section,  are  hereby  extended 

25  and  made  applicable  to  the  tax  imposed  by 

26  this  section. 

27  Jurisdiction   is   hereby   conferred   upon   the 

28  circuit  and  district  courts  of  the  United  States 

29  for  the  district  within  which  any  person  sum- 

30  moned  under  this  section  to  appear  to  testify 

31  or  to  produce  books,  as  aforesaid,  shall  reside, 

32  to    compel    such    attendance,    production    of 

33  books,  and  testimony  by  appropriate  process. 


200  FEDERAL  CORPORATION  TAX  LAW. 

1  SEC.    42.      That    unless    otherwise    herein 

2  specially  provided,  this  Act  shall  take  effect  on 

3  the  day  following  its  passage. 

Signed  Five  minutes  after  Five  o'clock  P.M. 
August  5th,  1909.  w.  H.  T. 


APPENDIX  II 

INTERNAL  REVENUE 
REGULATIONS 

PART  I 
(T.  D.  1571) 

Regulations  relating  to  the  assessment  and  collection 
of  the  special  excise  tax  imposed  by  section  38,  act 
of  August  5,  1909,  on  corporations,  joint  stock 
companies,  associations,  and  insurance  companies. 

(Regulations  No.  31) 

Treasury  Department, 
Office  of  Commissioner  of  Internal  Revenue, 

WASHINGTON,  D.  C.,  December  3,  1909. 
Section  38  of  the  act  of  August  5,  1909,  is  as 
follows: 

(Here  follows  text  of  Section  38,  for  which  see 
supra  Appendix  I.) 

Article  1 

The  attention  of  collectors  and  others  is  specially 
called  to  the  fact  that  the  tax  imposed  by  this  sec- 


202      FEDERAL  CORPORATION  TAX  LAW, 

tion  of  the  law  applies  to  all  corporations,  joint 
stock  companies,  associations,  or  insurance  com- 
panies described  (except  those  specifically  exempted), 
without  reference  to  the  kind  of  business  carried  on, 
and  that  the  tax  is  to  be  computed  upon  the  net 
income  of  such  corporations,  joint  stock  companies, 
associations,  and  insurance  companies,  which  shall 
be  calculated  by  subtracting  from  the  gross  income 
received  from  all  sources  during  the  year  certain 
deductions  specifically  set  forth  in  the  statute. 

Every  corporation,  joint  stock  company,  asso- 
ciation, or  insurance  company  not  specifically 
enumerated  as  exempt  shall  make  the  return  re- 
quired by  law,  whether  it  may  have  net  income 
liable  to  tax  or  not.1 

In  the  case  of  corporations,  joint  stock  companies, 
associations,  or  insurance  companies  organized 
under  the  authority  of  the.  United  States  or  any 
State  or  Territory  thereof,  including  Alaska  and 
District  of  Columbia,  such  net  income  relates  not 
only  to  the  business  carried  on  within  the  confines 
of  the  United  States,  but  to  income  received  from 
business  transacted  in  any  foreign  country  as  well.2 
In  case  of  corporations,  joint  stock  companies,  and 
associations  organized  under  the  authority  of  foreign 
countries  the  terms  "  Gross  income/'  "  Net  in- 
come," and  "  Authorized  deductions  "  relate  only 

1  As  to  the  correctness  of  this  construction  of  the  Act, 
see  supra  §  87,  §  72. 

2  See  supra  §  44A. 


APPENDIX  II.  203 

to  business  transacted  l  within  the  United  States  or 
any  State  or  Territory  thereof. 

Article  2  —  Gross  income 

The  following  definitions  and  rules  are  given  for 
determining  the  gross  income  of  the  various  classes 
of  corporations: 

1A.  Banks  and  other  'financial  institutions.  — 
Gross  income  consists  of  the  gross  revenue  derived 
from  the  operation  and  management  of  the  business 
and  property  of  the  corporation  making  the  return, 
together  with  all  amounts  of  income  (including 
dividends  received  on  stock  of  other  corporations,2 
joint  stock  companies,  associations,  and  insurance 
companies  subject  to  this  tax)  derived  from  all 
other  sources,  as  shown  by  the  entries  on  its  books  3 
from  January  1  to  December  31  of  the  year  for 
which  return  is  made.4 

IB.     Insurance  companies.  —  Same  as  1A  above. 

2.  Transportation    companies.  —  Same     as     1A 
above. 

3.  Manufacturing    companies.  —  Gross     income 
received  during  the  year  from  all  sources  will  con- 

1  This  apparently  overlooks  the  words,  "capital  invested/' 
which  are  found  in  the  Act.    See  supra  §  78,  §  80  et  seq. 

2  Of.  supra  §  34. 

3  Quaere,   as  to  income  entered  on  the  books   but  not 
actually  received.     See  supra  §  37. 

4  This,  like  many  other  parts  of  these  regulations,  assumes 
that  income  received  during  the  year  1909  before  the  Act' 
took  effect  is  to  be  included.    See  supra  §  39. 


204      FEDERAL  CORPORATION  TAX  LAW. 

sist  of  the  total  amount,  ascertained  through  an 
accounting,  that  shows  the  difference  between  the 
price  received  for  the  goods  as  sold  and  the  cost  of 
such  goods  as  manufactured.  The  cost  of  goods 
manufactured  shall  be  ascertained  by  an  addition 
of  a  charge  to  the  account  of  the  cost  of  goods  as 
manufactured  during  the  year  of  the  sum  of  the 
inventory  at  beginning  of  the  year  and  a  credit  to 
the  account  of  the  sum  of  the  inventory  at  the  end 
of  the  year.  To  this  amount  should  be  added  all 
items  of  income  received  during  the  year  from  other 
sources,  including  dividends  received  on  stock  of 
other  corporations,  joint  stock  companies,  associa- 
tions, and  insurance  companies  subject  to  this  tax. 
In  the  determination  of  the  cost  of  goods  manu- 
factured and  sold  as  above  such  cost  shall  compre- 
hend all  charges  for  maintenance  and  operation  of 
manufacturing  plant,  but  shall  not  embrace  allow- 
ances for  depreciation  of  property  nor  for  losses 
sustained  which  are  to  be  taken  account  of  in 
ascertaining  the  net  income  subject  to  tax  under 
the  proper  heading  in  the  authorized  deductions.1 

4.  Mercantile  companies.  —  Gross  amount  of 
income  received  during  the  year  from  all  sources 
consists  of  the  total  amount  ascertained  through 
inventory,  or  its  equivalent,  which  shows  the 
difference  between  the  price  received  for  goods  sold 

1  Quaere,  why  should  there  be  this  distinction  between 
expenses  of  maintenance  and  operation,  and  allowances  for 
depreciation  of  property,  both  of  which  are  treated  in  the 
Act  under  the  head  of  deductions?  See  supra  §  46,  §  53. 


APPENDIX  II.  205 

and  the  cost  of  goods  purchased  during  the  year, 
with  an  addition  of  a  charge  to  the  account  of  the 
sum  of  the  inventory  at  beginning  of  the  year  and  a 
credit  to  the  account  of  the  sum  of  the  inventory 
at  the  end  of  the  year.  To  this  amount  should  be 
added  all  items  of  income  received  during  the  year 
from  other  sources  inclusive  of  dividends  received 
on  stock  of  other  corporations,  joint  stock  compa- 
nies, associations,  and  insurance  companies  subject 
to  this  tax.  In  determining  this  amount  no  account 
shall  be  taken  of  allowances  for  depreciation  of 
property,  nor  for  losses  sustained  which  are  to  be 
taken  account  of  in  ascertaining  the  net  income 
subject  to  tax  under  the  proper  heading  in  the 
authorized  deductions. 

5.  Miscellaneous.  —  Gross  income  consists  of 
the  gross  revenue  derived  from  the  operation  and 
management  of  the  business  and  property  of  the 
corporation  making  the  return,  together  with  all 
amounts  of  income  (including  dividends  received 
on  stock  of  other  corporations,  joint  stock  com- 
panies, associations,  and  insurance  companies  sub- 
ject to  this  tax)  derived  from  all  other  sources  as 
shown  by  the  entries  on  the  books  from  January  1 
to  December  31  of  the  year  for  which  return  is  made. 

It  will  be  noted  from  these  definitions  that  gross 
income  is  practically  the  same  as  gross  profits,1  the 
only  difference  being  that  gross  income  is  more 
inclusive,  embracing  as  it  does  not  only  gross  profits 

1  Quaere,  as  to  the  correctness  of  this  statement.  See 
supra  §  31, 


206      FEDERAL  CORPORATION  TAX  LAW. 

of  the  corporation,  joint  stock  company,  and  asso- 
ciation itself,  but  also  all  amounts  of  income  re- 
ceived from  other  sources.  It  is  immaterial  whether 
any  item  of  gross  income  is  evidenced  by  cash  re- 
ceipts during  the  year  or  in  such  other  manner  as 
to  entitle  it  to  proper  entry  on  the  books  of  the 
corporation  from  January  1  to  December  31  for  the 
year  in  which  return  is  made.1 

Sale  of  capital  assests.2  —  In  ascertaining  income 
derived  from  the  sale  of  capital  assets,  if  the  assets 
were  acquired  subsequent  to  January  1,  1909,  the 
difference  between  the  selling  price  and  the  buying 
price  shall  constitute  an  item  of  gross  income  to  be 
added  to  or  subtracted  from  gross  income  according 
to  whether  the  selling  price  was  greater  or  less  than 
the  buying  price.  If  the  capital  assets  were  ac- 
quired prior  to  January  1,  1909,  the  amount  of 
increment  or  depreciation  representing  the  differ- 
ence between  the  selling  and  buying  price  is  to  be 
adjusted  so  as  to  fairly  determine  the  proportion  of 
the  loss  or  gain  arising  subsequent  to  January  1, 
1909,3  and  which  proportion  shall  be  deducted  from 
or  added  to  the  gross  income  for  the  year  in  which 
the  sale  was  made.  But  for  the  purpose  of  deter- 
mining the  selling  price,  as  provided  in  this  section, 

1  This  gives  a  liberal  construction  to  the  word  "  received." 
See  supra  §37. 

2  Quaere  as  to  the  soundness  of  the  views  of  the  law  on 
which  this  paragraph  is  based.    See  supra  §  35. 

3  In  addition  to  the  other  objections  to  this  regulation,  it 
assumes  that  income  received  before  the  Act  took  effect 
is  to  be  included  in  the  assessment.    Cf .  supra  §  39. 


APPENDIX  II.  207 

there  shall  be  added  to  the  price  actually  realized  on 
sale  any  amount  which  has  already  been  set  aside 
and  deducted  from  gross  income  by  way  of  depre- 
ciation as  defined  in  article  4  and  has  not  been  paid 
out  in  making  good  such  depreciation  on  the  prop- 
erty sold. 

Where  a  corporation  is  engaged  in  carrying  on 
more  than  one  class  of  business,  gross  income  de- 
rived from  the  different  classes  of  business  shall  be 
ascertained  according  to  the  definitions  above 
applicable  thereto. 

Article  3  —  Net  income 

Net  income  shall  be  ascertained  by  deducting 
from  the  gross  amount  of  the  income  of  such  cor- 
poration, joint  stock  company  or  association,  or 
insurance  company,  received  within  the  year  from 
all  sources,  (first)  all  the  ordinary  and  necessary 
expenses  actually  paid  within  the  year  out  of  in- 
come in  the  maintenance  and  operation  of  its 
business  and  properties,  including  all  charges  such 
as  rentals  or  franchise  payments,  required  to  be 
made  as  a  condition  to  the  continued  use  or  pos- 
session of  property;  (second)  all  losses  actually 
sustained  within  the  year  and  not  compensated  by 
insurance  or  otherwise,  including  a  reasonable 
allowance  for  depreciation  of  property,  if  any, 
and  in  the  case  of  insurance  companies  the 
sums  other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts  and  the  net 
addition,  if  any,  required  by  law  to  be  made 
within  year  to  reserve  funds;  (third)  interest  actu- 
ally paid  within  the  year  on  its  bonded  or  other 
indebtedness  to  an  amount  of  such  bonded  and 


208      FEDERAL  CORPORATION  TAX  LAW. 

other  indebtedness  not  exceeding  the  paid-up  cap- 
ital stock  of  such  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  out- 
standing at  the  close  of  the  year,  and  in  the  case  of  a 
bank,  banking  association,  or  trust  company,  all 
interest  actually  paid  by  it  within  the  year  on 
deposits.  [In  case  of  corporations,  joint  stock 
companies,  and  associations  organized  under  the 
laws  of  a  foreign  country,  "  the  proportion  of  its 
paid-up  capital  stock  outstanding  at  the  close  of 
the  year  which  the  gross  amount  of  its  income  for 
the  year  from  business  transacted  and  capital 
invested  within  the  United  States  and  any  of  its 
Territories,  Alaska,  and  the  District  of  Columbia 
bears  to  the  gross  amount  of  its  income  derived 
from  all  sources  within  and  without  the  United 
States  "]; 1  (fourth)  all  sums  paid  by  it  within  the 
year  for  taxes  imposed  under  the  authority  of  the 
United  States  or  of  any  State  or  Territory  thereof, 
or  imposed  by  the  government  of  any  foreign 
country  as  a  condition  to  carrying  on  business 
therein;  (fifth)  all  amounts  received  by  it  within 
the  year  as  dividends  upon  stock  of  other  corpora- 
tions, joint  stock  companies  or  associations,  or 
insurance  companies,  subject  to  the  tax  hereby 
imposed. 

Section  38  further  provides: 

That  in  the  case  of  a  corporation,  joint  stock 

1  NOTE.  —  The  matter  included  in  brackets  [  ]  relates 
to  interest  actually  paid  within  the  year  on  "  bonded  or  other 
indebtedness,"  and  should  be  read  in  connection  with  the 
preceding  provision  (art.  3)  relating  to  such  interest  paid 
by  corporations,  joint  stock  companies,  etc.,  organized  in  the 
United  States.  (This  note  is  by  the  Commissioner  of  Inter- 
nal Revenue.) 


APPENDIX  II.  209 

company  or  association,  or  insurance  company, 
organized  under  the  laws  of  a  foreign  country,  such 
net  income  shall  be  ascertained  (by  making  like 
deductions)  from  the  gross  amount  of  its  income 
received  within  the  year  from  business  transacted 
and  its  capital  invested  within  the  United  States 
and  any  of  its  Territories,  Alaska,  and  the  District 
of  Columbia. 

Also  that: 

In  the  case  of  assessment  insurance  companies  the 
actual  deposit  of  sums  with  state  or  territorial 
officers,  pursuant  to  law,  as  additions  to  guaranty  or 
reserve  fund,  shall  be  treated  as  being  payments 
required  by  law  to  reserve  fund. 

Also  (third  paragraph)  that: 

There  shall  be  deducted  from  the  amount  of 
the  net  income  of  each  of  such  corporations,  joint 
stock  companies  or  associations,  or  insurance 
companies,  ascertained  as  provided  in  the  fore- 
going paragraphs  of  this  section,  the  sum  of  five 
thousand  dollars. 

The  net  income,  therefore,  is  the  remainder  of  the 
gross  income  after  making  the  specified  deductions.1 

Article  4.  —  Deductions 

The  specified  deductions  actually  paid  within  the 
year,  set  forth  in  the  statute  and  as  described  in 
article  3  preceding,  shall  include  all  proper  items  of 
expenses  and  charges  under  the  respective  heads  as 

1  Quaere,  whether  any  deductions  in  addition  to  those 
specially  required  by  the  Act  are  permissible.  See  supra  §  45. 


210      FEDERAL  CORPORATION  TAX  LAW. 

designated.  The  amount  returned  for  ordinary  and 
necessary  expenses  actually  paid  within  the  year 
out  of  income  in  maintenance  and  operation  of  the 
business  and  properties  of  the  corporation  should 
not,  however,  embrace  allowances  for  depreciation 
of  fixed  property  which  are  otherwise  to  be  taken 
account  of  under  the  proper  heading  in  the  author- 
ized deductions,  nor  expenses  paid  within  the  year 
and  charged  to  such  allowances  for  depreciation 
credited  in  the  current  year  or  in  previous  years. 
In  ascertaining  expenses  proper  to  be  included  in 
the  deductions  to  be  made  under  this  article,  cor- 
porations carrying  materials  and  supplies  on  hand 
for  use  should  include  in  such  expenses  the  charges 
for  materials  and  supplies  only  to  the  amount  that 
the  same  are  actually  disbursed  and  used  in  opera- 
tion and  maintenance  during  the  year  for  which  the 
return  is  made.  , 

It  is  immaterial  whether  the  deductions  are 
evidenced  by  actual  disbursements  in  cash,  or 
whether  evidenced  in  such  other  way  as  to  be  prop- 
erly acknowledged  by  the  corporate  officers  and  so 
entered  on  the  books  as  to  constitute  a  liability 
against  the  assets  of  the  corporation,  joint  stock 
company,  association,  or  insurance  company  making 
the  return.1 

Losses.  —  The  deduction  for  losses  must  be  in 
respect  of  losses  actually  sustained  during  the  year 


1  This  is  a  liberal  construction  in  favor  of  the  corporations 
cf  the  expression  "  actually  paid."    See  supra  §  49. 


APPEETDIX  II.  211 

and  not  compensated  by  insurance  or  otherwise. 
It  must  be  based  upon  the  difference  between  the 
cost  value  and  salvage  value  of  the  property  or 
assets,  including  in  the  latter  value  such  amount,  if 
any,  as  has  in  the  current  or  previous  years  been  set 
aside  and  deducted  from  gross  income  by  way  of 
depreciation  as  defined  in  the  following  section  and 
not  been  paid  out  in  making  good  such  depreciation. 
Depreciation.  —  The  deduction  for  depreciation 
should  be  the  estimated  amount  of  the  loss,  accrued 
during  the  year  to  which  the  return  relates,1  in  the 
value  of  the  property  in  respect  of  which  such 
deduction  is  claimed  that  arises  from  exhaustion, 
wear  and  tear,  or  obsolescence  out  of  the  uses  to 
which  the  property  is  put,  and  which  loss  has  not 
been  made  good  by  payments  for  ordinary  main- 
tenance and  repairs  deducted  under  the  heading  of 
expenses  of  maintenance  and  operation  or  in  the 
ascertainment  of  gross  income.  This  estimate 
should  be  formed  upon  the  assumed  life  of  the 
property,  its  cost  value,  and  its  use.  Expenses  paid 
in  any  one  year  in  making  good  exhaustion,  wear 
and  tear,  or  obsolescence  in  respect  of  which  any 
deduction  for  depreciation  is  claimed  must  not  be 
included  in  the  deduction  for  expense  of  maintenance 
and  operation  of  the  property  or  in  the  ascertain- 
ment of  gross  income,  but  must  be  made  out  of 
accumulative  allowances  deducted  for  depreciation 
in  current  and  previous  years. 

1  As  to  this  see  supra  §  67. 


212      FEDERAL  CORPORATION  TAX  LAW. 

Article  5.  —  Inventories 

It  will  be  noted  that  an  inventory  or  its  equivalent 
of  materials,  supplies,  and  merchandise  on  hand  for 
use  or  sale  at  the  close  of  each  calendar  year  is  essen- 
tial in  the  case  of  certain  corporations  in  order  to 
determine  the  gross  income,  and  in  case  of  other 
corporations  to  determine  their  expenses  of  opera- 
tion. Where  such  inventory  or  its  equivalent  was 
not  taken  at  the  close  of  the  year  1908,  a  supple- 
mental statement  showing  such  inventory  approxi- 
mately must  be  submitted  with  the  return  on  the 
regular  form.1  Such  supplemental  statement  shall 
be  verified  under  oath  by  the  treasurer  or  principal 
financial  officer  in  submitting  the  same. 

Where  any  item  under  any  of  the  deductions  is  of 
an  unusual  nature  a  special  explanatory  note  re- 
ferring to  such  item  shall  be  made  and  attached  to 
the  form  at  the  appropriate  place  and  made  a  part 
thereof  by  proper  reference.2 

Paragraph  3  of  said  section  38  also  provides: 

And  said  tax  shall  be  computed  upon  the  remainder 
of  said  net  income  of  such  corporation,  joint  stock 
company  or  association,  or  insurance  company,  for 
the  year  ending  December  thirty-first,  nineteen 
hundred  and  nine,  and  for  each  calendar  year  there- 
after; and  on  or  before  the  first  day  of  March, 

1  It  is  submitted  that  this  requirement  is  unauthorized  by 
law,  and  need  not  be  obeyed.    See  supra  §  90,  §  100,  §  101. 

2  As  to  the  propriety  of  following  such  a  course,  see  supra 
§100. 


APPENDIX  II.  213 

nineteen  hundred  and  ten,  and  the  first  day  of 
March  in  each  year  thereafter,  a  true  and 
accurate  return  under  oath  or  affirmation  of  its 
president,  vice-president,  or  other  principal  officer, 
and  its  treasurer  or  assistant  treasurer,  shall  be 
made  by  each  of  the  corporations,  joint  stock  com- 
panies or  associations,  and  insurance  companies, 
subject  to  the  tax  imposed  by  this  section,  to  the 
collector  of  internal  revenue  for  the  district  in 
which  such  corporation,  joint  stock  company  or  as- 
sociation, or  insurance  company,  has  its  principal 
place  of  business,  or,  in  the  case  of  a  corporation, 
joint  stock  company  or  association,  or  insurance 
company,  organized  under  the  laws  of  a  foreign 
country,  in  the  place  where  its  principal  business 
is  carried  on  within  the  United  States,  in  such  form 
as  the  Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury,  shall 
prescribe. 

Each  return  so  made  is  required  to   set  forth: 

(a)  The  total  amount  of  the  paid-up  capital 
stock  of  such  corporations,  joint  stock  compa- 
,  nies  or  associations,  or  insurance  companies,  out- 
standing at  the  close  of  the  year; 

(6)  The  total  amount  of  bonded  and  other  in- 
debtedness of  such  corporation,  joint  stock  com- 
pany or  association,  or  insurance  company,  at 
the  close  of  the  year; 

(c)  The  gross  amount  of  the  income  of  such 
corporation,  joint  stock  company  or  association, 
or  insurance  company,  received  during  the  year 
from  all  sources,  and  if  organized  under  the  laws 
of  a  foreign  country,  the  gross  amount  of  its 


214      FEDERAL  CORPORATION  TAX  LAW. 

income  received  within  the  year  from  business 
transacted  and  capital  invested  within  the  United 
States  and  any  of  its  Territories,  Alaska,  and  the 
District  of  Columbia. 

Such  returns  are  also  required  to  set  forth  the 
items  claimed  as  deductions  (Article  4),  also  the  net 
income  after  such  deductions  have  been  made. 

Article  6 

Under  the  authority  conferred  by  this  act  forms 
of  return  have  been  prescribed,1  in  which  the  various 
items  specified  in  the  law  are  to  be  stated. 

Blank  forms  of  this  return  will  be  mailed  to  col- 
lectors and  should  be  furnished  to  every  corporation, 
not  expressly  excepted,  on  or  before  January  1,  1910, 
and  on  or  before  January  1st  of  each  year  thereafter. 
Failure  on  the  part  of  any  corporation,  joint  stock 
company,  association,  or  insurance  company  liable 
to  this  tax,  to  receive  a  blank  form  will  not  excuse 
it  from  making  the  return  required  by  law,  or  relieve 
it  from  any  penalties  for  failure  to  make  the  return 
in  the  prescribed  time.2  Corporations  not  supplied 
with  the  proper  forms  for  making  the  return  should 
make  application  therefor  to  the  collector  of  internal 
revenue  in  whose  district  is  located  its  principal 
place  of  business.  Each  corporation  should  care- 
fully prepare  its  return  so  as  to  fully  and  clearly 
set  forth  the  data  therein  called  for. 

1  For  which  see  infra  Appx.  III. 
3  See  supra  §  86. 


APPENDIX  II.  215 

Bookkeeping.  —  No  particular  system  of  book- 
keeping or  accounting  will  be  required  by  the 
Department.  However,  the  business  transacted  by 
corporations,  joint  stock  companies,  associations, 
or  insurance  companies  must  be  so  recorded  that 
each  and  every  item  therein  set  forth  may  be 
readily  verified  by  an  examination  of  the  books 
and  accounts,  where  such  examination  is  deemed 
necessary.1 

Calendar  year.  —  As  the  law  specifically  provides 
that  the  tax  imposed  shall  be  computed  on  the  net 
income  during  each  "  calendar  year,"  returns  of 
income  based  on  any  period  other  than  the  calendar 
year  can  not  be  accepted.2 

Corporations  organized  during  the  year  or  going 
into  liquidation  during  the  year  should  nevertheless 
render  a  sworn  return  on  the  prescribed  form.3 

Article  7 

Collectors  will  see  that  as  soon  as  each  return 
made  by  any  corporation  is  received  a  record  on 
Form  632  is  made,  setting  out  the  name  of  the 
corporation  making  the  return,  the  nature  of  the 
principal  business  transacted,  the  location  of  prin- 
cipal place  of  business,  with  net  income  reported, 
and  the  date  on  which  such  return  was  received. 

1  It  is  submitted  that  the  Treasury  Department  has  no 
power  to  exact  any  such  requirement.    See  supra  §  90,  §  100, 
§  101. 

2  See  supra  §  84A. 

3  Cf .  supra  §  29. 


216      FEDERAL  CORPORATION  TAX  LAW. 

The  date  of  receipt  in  each  case  will  be  noted  in  the 
last  column  of  that  form,  in  which  column  the  list 
on  which  assessment  is  made  will  also  be  noted. 
For  this  purpose  the  column  so  used  may  be  sub- 
divided, or  the  date  of  receipt  of  such  returns  may 
be  noted  in  red  ink  over  the  date  entered  therein 
as  to  such  assessment  list. 

Any  collector  will,  whenever  it  appears  advisable 
to  do  so,  request  that  a  revenue  agent  be  specially 
designated  to  collect  and  furnish  this  office  with 
such  other  data  as,  in  his  judgment,  is  necessary  to 
determine  the  actual  amount  of  tax  to  be  assessed 
against  any  corporation,  joint  stock  company,  or 
association  which  under  the  law  set  forth  in  these 
regulations  is  required  to  make  return.1 

Such  returns  are  required  to  be  made  not  later 
than  March  1  of  each  year,  and  any  failure  to  com- 
ply with  the  law  in  this  regard  should  be  at  once 
reported  by  the  collector  to  the  Commissioner  of 
Internal  Revenue.2 

To  enable  collectors  to  determine  whether  all 
returns  due  have  been  received,  a  careful  canvass  of 
each  district  should  be  made,  and  all  corporations, 
joint  stock  companies,  and  associations  subject  to 
the  tax  imposed  should  be  listed  as  above  di- 
rected,3 

1  It  seems  clear  that  the  Commissioner  of  Internal  Revenue 
would  not  be  justified  in  acting  upon  such  a  request  un- 
supported by  evidence.  See  supra  §  106,  §  110,  §  134. 

2Cf.  supra  §86,  §  130. 

3  Of.  supra  §  130. 


APPEKDIX  II.  217 

Article  8 

For  statistical  purposes  all  such  corporations, 
joint  stock  companies,  and  associations  will  be 
classified  as  follows: 

Class  A:  Financial  and  commercial.  —  Including 
banks,  banking  associations,  trust  companies, 
guaranty  and  surety  companies,  title  insurance 
companies,  building  associations  (if  for  profit),  and 
insurance  companies,  not  specifically  exempt. 

Class  B:  Public  service.  —  Such  as  railroads, 
steamboat,  ferryboat,  and  stage-line  companies; 
pipe-line,  gas,  and  electric-light  companies;  express, 
transportation,  and  storage  companies;  telegraph 
and  telephone  companies. 

Class  C :  Industrial  and  manufacturing.  —  Such  as 
mining,  lumber,  and  coke  companies;  rolling  mills; 
foundry  and  machine  shops;  saw-mills;  flour, 
woolen,  cotton,  and  other  mills;  manufacturers  of 
cars,  automobiles,  elevators,  agricultural  imple- 
ments, and  all  articles  manufactured  wholly  or  in 
part  from  metal,  wood,  or  other  material;  manu- 
facturers or  refiners  of  sugar,  molasses,  sirups,  or  other 
products;  ice  and  refrigerating  companies ;  slaughter- 
house, tannery,  packing,  or  canning  companies,  etc. 

Class  D:  Mercantile.  — Including  all  dealers  (not 
otherwise  classed  as  producers  or  manufacturers) 
in  coal,  lumber,  grain,  produce,  and  all  goods,  wares, 
and  merchandise. 

Class  E:  Miscellaneous.  —  Such  as  architects, 
contractors,  hotel,  theater,  or  other  companies,  or 
associations,  not  otherwise  classed. 


218      FEDERAL  CORPORATION  TAX  LAW. 

When  classified  as  above  indicated  the  names  of 
the  various  corporations,  companies,  and  associa- 
tions will  be  listed  alphabetically,  and  will  be  num- 
bered consecutively  (commencing  with  No.  1  in 
each  class),  and  in  forwarding  returns  or  papers 
subsequently  rendered  or  submitted  by  such  cor- 
porations or  companies  collectors  will  see  that  the 
same  have  placed  thereon  the  designating  class 
letter  and  number  corresponding  with  those  noted 
on  the  lists  herein  required  to  be  furnished. 

Article  9.  —  Examination  of  books,  etc.,  by  revenue 

agents 

Paragraph  4  of  said  section  38  provides: 

Fourth.  Whenever  evidence  shall  be  produced 
before  the  Commissioner  of  Internal  Revenue 
which  in  the  opinion  of  the  commissioner  justifies 
the  belief  that  the  return  made  by  any  corporation, 
joint  stock  company  or  association,  or  insurance 
company,  is  incorrect,  or  whenever  any  collector  shall 
report  to  the  Commissioner  of  Internal  Revenue 
that  any  corporation,  joint  stock  company  or  as- 
sociation, or  insurance  company,  has  failed  to 
make  a  return  as  required  by  law,  the  Commissioner 
of  Internal  Revenue  may  require  from  the  corpora- 
tion, joint  stock  company  or  association,  or  in- 
surance company  making  such  return,  such  further 
information  with  reference  to  its  capital,  income, 
losses,  and  expenditures  as  he  may  deem  expedi- 
ent; and  the  Commissioner  of  Internal  Revenue,  for 
the  purpose  of  ascertaining  the  correctness  of 
such  return  or  for  the  purpose  of  making  a  return 
where  none  has  been  made,  is  hereby  authorized, 


APPENDIX  II.  219 

by  any  regularly  appointed  revenue  agent  specially 
designated  by  him  for  that  purpose,  to  examine 
any  books  and  papers  bearing  upon  the  matters 
required  to  be  included  in  the  return  of  such  cor- 
poration, joint  stock  company  or  association,  or 
insurance  company,  and  to  require  the  attendance 
of  any  officer  or  employee  of  such  corporation, 
joint  stock  company  or  association,  or  insurance 
company,  and  to  take  his  testimony  with  reference 
to  the  matter  required  by  law  to  be  included  in 
such  return,  with  power  to  administer  oaths  to 
such  person  or  persons;  and  the  Commissioner 
of  Internal  Revenue  may  also  invoke  the  aid  of  any 
court  of  the  United  States  having  jurisdiction 
to  require  the  attendance  of  such  officers  or  em- 
ployees and  the  production  of  such  books  and 
papers.  Upon  the  information  so  acquired  the 
Commissioner  of  Internal  Revenue  may  amend 
any  return  or  make  a  return  where  none  has  been 
made.  All  proceedings  taken  by  the  Commissioner 
of  Internal  Revenue  under  the  provisions  of  this 
section  shall  be  subject  to  the  approval  of  the 
Secretary  of  the  Treasury. 

Article   10.  —  Assessment  and  collection  of  taxy  etc. 
Paragraph  5  of  said  section  38  provides: 

Fifth.  All  returnr  shall  be  retained  by  the  Com- 
missioner of  Internal  Revenue,  who  shall  make 
assessments  thereon;  and  in  case  of  any  return  made 
with  false  or  fraudulent  intent,  he  shall  add  one 
hundred  per  centum  of  such  tax,  and  in  case  of  a 
refusal  or  neglect  to  make  a  return  or  to  verify 
the  same  as  aforesaid  he  shall  add  fifty  per  centum 
of  such  tax.  In  case  of  neglect  occasioned  by  the 
sickness  or  absence  of  an  officer  of  such  corpora- 
tion, joint  stock  company  or  association,  or  in- 


220      FEDERAL  CORPORATION  TAX  LAW. 

surance  company,  required  to  make  said  return,  or 
for  other  sufficient  reason,  the  collector  may  allow 
such  further  time  for  making  and  delivering  such 
return  as  he  may  deem  necessary,  not  exceeding 
thirty  days.  The  amount  so  added  to  the  tax  shall 
be  collected  at  the  same  time  and  in  the  same 
manner  as  the  tax  originally  assessed  unless  the 
refusal,  neglect,  or  falsity  is  discovered  after  the 
date  for  payment  of  said  taxes,  in  which  case  the 
amount  so  added  shall  be  paid  by  the  delinquent 
corporation,  joint  stock  company  or  association,  or 
insurance  company  immediately  upon  notice  given 
by  the  collector.  All  assessments  shall  be  made  and 
the  several  corporations,  joint  stock  companies 
or  associations,  or  insurance  companies,  shall  be 
notified  of  the  amount  for  which  they  are  respect- 
ively liable  on  or  before  the  first  day  of  June  of 
each  successive  year,  and  said  assessments  shall 
be  paid  on  or  before  the  thirtieth  day  of  June,  except 
in  cases  of  refusal  or  neglect  to  make  such  return, 
and  in  cases  of  false  or  fraudulent  returns,  in  which 
cases  the  Commissioner  of  Internal  Revenue  shall, 
upon  the  discovery  thereof,  at  any  time  within  three 
years  after  said  return  is  due,  make  a  return  upon 
information  obtained  as  above  provided  for,  and 
the  assessment  made  by  the  Commissioner  of 
Internal  Revenue  thereon  shall  be  paid  by  such 
corporation,  joint  stock  company  or  association, 
or  insurance  company  immediately  upon  notifica- 
tion of  the  amount  of  such  assessment;  and  to  any 
sum  or  sums  due  and  unpaid  after  the  thirtieth  day 
of  June  in  any  year,  and  for  ten  days  after  notice  and 
demand  thereof  by  the  collector,  there  shall  be 
added  the  sum  of  five  per  centum  on  the  amount 
of  tax  unpaid  and  interest  at  the  rate  of  one  per 
centum  per  month  upon  said  tax  from  the  time  the 
same  becomes  due. 


APPENDIX  II.  221 

Upon  the  receipt  and  verification  of  the  returns 
rendered,  the  tax  as  ascertained  to  be  due  will  be 
assessed  as  above  prescribed;  and  notice  of  such 
assessment  will  be  given  and  subsequent  demand 
made  (if  necessary)  on  Forms  17  and  21,  respect- 
ively.1 

In  case  of  failure  to  make  returns  within  the  time 
and  manner  required  by  the  statute,  or  where  the 
return  rendered  is  found  or  believed  2  to  be  incorrect, 
action  in  such  cases  will  be  taken,  as  provided  in 
paragraph  4  of  the  law. 

The  additional  tax  imposed  by  paragraph  5  of 
the  law  for  failure  to  make  the  required  return,  or 
for  making  a  false  or  fraudulent  return,  will  in  all 
cases  be  assessed  as  therein  provided. 


Article  11. — Returns  to  constitute  public  records 

Paragraph  6  of  said  section  38  provides: 

Sixth.  When  the  assessment  shall  be  made,  as 
provided  in  this  section,  the  returns,  together  with 
any  corrections  thereof  which  may  have  been  made 
by  the  commissioner,  shall  be  filed  in  the  office 
of  the  Commissioner  of  Internal  Revenue  and  shall 
constitute  public  records  and  be  open  to  inspection 
as  such. 

1  See  supra  §  123. 

2  This  should  be  construed  to  mean  "  believed  from  evi- 
dence adduced  before  the  Commissioner."    See  supra  §  106, 
§110,   §134. 


222  FUDKUAL   COlirORATTON   TAX   LAW. 

Article  12.  —  Penalties 

Paragraphs  7  and  S  of  section  ,SS  provide: 

Seventh.  It  shall  be  unlawful  for  any  collector, 
deputy  collector,  agent,  clerk,  or  other  officer  or 
employee  of  the  United  States  to  divulge  or  make 
known  in*  any  manner  whatever  not  provided  by 
law  to  any  person  any  information  obtained  by 
him  in  the  discharge  of  his  official  duty,  or  to  di- 
vulge or  make  known  in  any  manner  not  provided 
by  law  any  document  received,  evidence  taken, 
or  report  made  under  this  section  except  upon  the 
special  direction  of  the  President;  and  any  of- 
fense against  the  foregoing  provision  shall  be  a 
misdemeanor  and  be  punished  by  a  fine  not  ex- 
ceeding one  thousand  dollars,  or  by  imprisonment 
not  exceeding  one  year,  or  both,  at  the  discretion 
of  the  court. 

Eighth.  If  any  of  the  corporations,  joint  stock 
companies  or  associations,  or  insurance  companies, 
aforesaid,  shall  refuse  or  neglect  to  make  a  return 
at  the  time  or  times  hereinbefore  specified  in  each 
year,  or  shall  render  a  false  or  fraudulent  return, 
such  corporation,  joint  stock  company  or  associa- 
tion, or  insurance  company,  shall  be  liable  to  a 
penalty  of  not  less  than  one  thousand  dollars 
and  not  exceeding  ten  thousand  dollars. 

Any  person  authorized  by  law  to  make,  render, 
sign,  or  verify  any  return  who  makes  any  false 
or  fraudulent  return,  or  statement,  with  intent  to 
defeat  or  evade  the  assessment  required  by  this 
section  to  be  made,  shall  be  guilty  of  a  misde- 
meanor, and  shall  be  fined  not  exceeding  one 
thousand  dollars  or  be  imprisoned  not  exceeding 
one  year,  or  both,  at  the  discretion  of  the  courts, 
with  the  costs  of  prosecution. 


APPENDIX  II.  223 

Article  13.  • —  Certain  revenue  laws  made  applicable, 
and  jurisdiction  conferred  on  United  States  courts  to 
compel  attendance  of  witnesses,  etc. 

Paragraph  8  further  provides: 

All  laws  relating  to  the  collection,  remission,  and 
refund  of  internal-revenue  taxes,  so  far  as  applicable 
to  and  not  inconsistent  with  the  provisions  of  this 
section,  are  hereby  extended  and  made  applicable 
to  the  tax  imposed  by  this  section. 

Jurisdiction  is  hereby  conferred  upon  the  cir- 
cuit and  district  courts  of  the  United  States  for  the 
district  within  which  any  person  summoned  under 
this  section  to  appear  to  testify  or  to  produce 
books,  as  aforesaid,  shall  reside,  to  compel  such 
attendance,  production  of  books,  and  testimony  by 
appropriate  process. 

Article  14.  —  Collection  of  tax 

The  tax  assessed  under  the  provisions  of  this  act 
will  be  collected  and  will  be  receipted  for  on  Form  1, 
as  in  the  case  of  other  assessed  taxes.  Unless  paid 
within  the  time  fixed  by  the  statute,  notice  and 
demand  should  be  at  once  issued,  and,  in  case  of 
nonpayment,  distraint  proceedings  should  be  insti- 
tuted without  delay. 

ROYAL  E.  CABELL,  Commissioner. 

Approved: 
FRANKLIN  MACVEAGH,  Secretary  of  the  Treasury. 


224      FEDERAL  CORPORATION  TAX  LAW. 

PART  II 

(T.  D.   1578) 

Excise  Tax 

Corporations  to  render  returns  to  collectors  of  internal 
revenue  for  the  calendar  year  1909  and  each  calendar  year 
thereafter.  —  Actual  inventories  required  only  when 
taxable  net  income  can  not  be  stated  otherwise.  —  Book 
inventories,  or  statements  therefrom  equivalent  to  in- 
ventories, permissible  when  showing  the  real  taxable 
income. 

Treasury  Department, 
Office  of  Commissioner  Internal  Revenue, 

Washington,  D.  C.,  January  4,  1910. 
To  collectors  of  internal  revenue  and  others  interested: 
Many  inquiries  have  been  made  at  this  office 
concerning  the  requirements  of  section  38,  act  of 
August  5,  1909,  levying  an  excise  tax  of  1  per  cent 
of  the  total  net  income  over  $5,000  of  corporations, 
as  to  the  time  that  must  be  covered  by  the  returns 
of  such  corporations. 

In  order  that  the  position  of  this  office  may  be 
known  to  all  interested  in  this  subject,  attention  is 
invited  to  the  language  of  the  act  bearing  on  this 
point.  Subdivision  3  reads,  in  part,  as  follows: 

.  .  .  and  said  tax  shall  be  computed  upon  the 
remainder  of  said  net  income  of  such  corporation, 
joint  stock  company  or  association,  or  insurance 
company,  for  the  year  ending  December  thirty-first, 
nineteen  hundred  and  nine,  and  for  each  calendar 
year  thereafter. 


APPENDIX  II.  225 

From  this  it  will  be  seen  that  the  law  fixes  the 
calendar  year  as  the  period  to  be  covered  by  these 
returns,1  and  no  one  is  vested  with  discretionary 
power  to  change  it. 

Many  inquiries  have  been  submitted  as  to  the 
manner  of  arriving  at  an  inventory  January  1,  1909, 
when  none  was  taken  on  'that  date  and  where  the 
fiscal  year  of  the  corporation  ends  with  a  date  other 
than  December  31. 

In  article  5  of  Regulations  No.  31  it  is  stated  that 
an  inventory  or  its  equivalent  of  materials,  supplies, 
and  merchandise  on  hand  for  use  or  sale  at  the  close 
of  each  calendar  year  is  essential  in  the  case  of  certain 
corporations  in  order  to  determine  the  gross  income, 
and  in  case  of  other  corporations  to  determine  their 
expenses  of  operation.  Where  such  inventory  or 
its  equivalent  was  not  taken  at  the  close  of  the  year 
1908,  a  supplemental  statement  showing  such  in- 
ventory approximately  must  be  submitted  with  the 
return  on  the  regular  form.  Such  supplemental 
statement  shall  be  verified  under  oath,  etc. 

Under  the  statute  no  return  for  a  period  other 
than  the  calendar  year  can  be  accepted.  The 
primary  object  to  be  kept  in  view  is  the  preparation 
of  a  statement  or  return  which  shall  correctly  set 
forth  the  net  income  taxable  under  the  law.  If  this 

1  See  supra  §  84A.  These  regulations  assume  that  the 
tax  is  to  be  computed  upon  the  income  of  the  entire  year 
1909  and  not  upon  only  so  much  thereof  as  elapsed  after  the 
statute  took  effect.  As  to  the  correctness  of  this  assumption, 
see  supra  §  29,  §  39. 


226      FEDERAL  CORPORATION  TAX  LAW. 

can  be  accomplished  without  the  necessity  of  an 
inventory,  either  at  the  beginning  or  the  close  of  the 
calendar  year,  actual  inventories  are  not  necessary. 
If,  however,  a  statement  such  as  may  be  verified  by 
oath  of  the  officers  of  the  corporation,  showing  the 
net  taxable  income,  can  not  be  made  without  an 
inventory,  then  the  same  is  necessarily  required.1 
It  is  believed  that  corporations  whose  business  is 
of  sufficient  volume  to  produce  a  taxable  income 
under  this  law  would  ordinarily  keep  such  books  as 
would  enable  them  to  arrive  at  a  book  inventory, 
or  what  might  be  termed  the  "  equivalent  "  of  an 
inventory,  for  the  period  between  the  1st  of  January 
and  the  end  of  their  fiscal  years.  While  the  office  is 
unable  to  set  forth  any  rule  in  this  connection  for 
arriving  at  inventories  or  their  equivalents,  the 
corporations  will  readily  see  the  necessity  of  resort- 
ing to  the  best  means  at  their  hands  to  show  in  their 
sworn  returns  their  net  taxable  income. 

ROYAL  E.  CABELL,  Commissioner. 

1  This  clause  indicates  somewhat  of  a  recession  from  the 
absolute  requirement  of  an  inventory  attempted  to  be  pre- 
scribed in  the  Regulations  of  Dec.  3d,  1909.  As  stated  above, 
it  is  submitted  that  no  such  requirement  could  be  enforced. 
See  supra  §  100.  As  to  the  course  to  be  pursued  where  the 
'company  is  unable  to  make  an  accurate  return  see  §101. 
The  maxim,  lex  non  cogit  ad  impossibilia,  would  seem  to 
govern  such  cases. 


APPENDIX  III.    FORMS  OF  RETURNS 

PRESCRIBED    BY    THE    TREASURY    DEPARTMENT 


^<^<* 

• 

TJ<^ 

• 
• 

it 

8 

c3     ' 

€# 

§« 

eS 

ll 

o> 

• 

f>* 

•S  ^ 

*  t>>€^^ 

•8 

$ 

.g    <D              ;3 

;£ 

i-s^ 

•'S.-S 

1 

o 

fl      :      '    fl 

£ 

51 

+»        ' 

3 

i"« 

•*  o-j    •  o 

73 

:^  8 

o3     • 

d  or  other  indebtedness  outstanding  at 
oteA)  . 

DEDUCTIONS. 

ie  ordinary  and  necessary  expenses  ( 
business  and  properties  of  the  corporati 
sses  sustained  January  1  to  December  c 
jpreciation  January  1  to  December  31  .  . 
r  than  dividends  paid  within  the  year 
itracts.  . 

^ 

5 

1 

>» 

^D 

i 
1 

§ 

"^3 

;3'c 

"SI 

"Sg 

;e  Note  B)  
st  January  1  to  December  31  on  bond( 
Dunt  not  to  exceed  amount  of  paid-up 
5  Note  B)  .  . 

nuary  1  to  December  31  imposed  under 
ites  or  any  State  or  Territory  thereof  .  . 

s 

I 

0 

ary 
ount 
No 
wit 


•    «•-•    QJ 

fc^S  8 
p  ^*o i-iQ 

§  £$ b-2 

fii'!g£ 
•a  Pi 

^11 

C  S«9    X, 

I  ill; 

^i  in 

^^^^^ 

iiin 


nu 
mo 
see 
id 
B) 
to 
an 


a 
a 


st 
a 
a 
t 


to 
se  ye 
f  ires 
(  N 
Januar 
States 
aid 


*fi  **O     V  «M  .  .  j   n-t      '" 

°    Q>   O    O   tJ^ln   ^^ 
^"S'o-^  ^'c3-^  cc  ^ 

IliUsI^ 
Sill  a*" 


a 

* 


5 

o 


§ 

€* 

^  y 

C 

y" 

i 

rporations,  joint- 
iject  to  this  tax  $  .  , 

1 

il 

1 

O   o3 

jgj 

•s| 

: 

3 

^ 

1 

-S    ^ 

> 

*£       I 

02  S 

1  ' 

o      i 

gs 
&.I 

i 

+»        ' 

a   < 

-il 

Is 

I" 

fl   <3 

S    - 

•^3   02 

1 

§ 

0 

:sls 
^^^ 

c 

| 

i 

o'§^ 

£?s  c 
I*J 

4^ 
C 

e 

§ 

s 

o 

n 

x-'f 

42      2      H 

"d^ 

|i- 

> 

4 

c 

_c 
~c 

1 

|| 

n 

ii 

5~ 

§ 

-i-3  *S 

c 

40 

fl    02 

^ 

h^ 

t~ 

r    C. 

^.^ 

§ 

o 

a 
<i 

8 

2 

!J 

•IS 

J  <1    H 

w 
s 
o 

§ 


OF  ANNUAL 


$5,0 


•P   O  -^      * 

~     ^SS.83 


Illfll 


corporation, 
imself,  deposes  a 
owledge  and  belief 
ery  particular;  that 
ut  any  deduction  w 
that  the  net  inco 


hi 


2<=i 
I- 

<U      - 

rO 


of  the 
ration 
ther  cor 
own  by 


*B*1     -S3 

«    0,°-*  «'3 

Iiss1  '§§-£• 

5  °J4  «  6-3  Ah  o 

Illlllils 

=2.^  ffi  8  S  rn  m  0  ^ 


3  o  S£ 

..^j^^^cSo^^ 

|^l-a|li5 

I^^Sl^og. 

§  fc  >:  ^^^^^  ^' 

1  rill's  8^1 
B&sl^'8:lls 

S       S^  o  ^^-5    I 

8^^^-S^^  S  I 

O  S  £   ^^^   S  gr^ 

i     ^-c  r  i  a  8° 


M 

<y 

r—  i 

•| 

M 

i-O 

^ 

p 

£> 

I 

i 

& 

•r* 

O5  l*~^ 

1-3  C/^            •  ^ 

3i 

^ 

<=/= 

*£&$ 

2 

£ 

1-1    PH 

d 

a  x 

1 

g                 .     *g 

J 

i?   ; 

^3 

?* 

O5               ^ 

^ 

ri  "*"* 

o  ^ 

N 

*     r~~^                 S    ^ 

§  »-2  ^^ 

fn    CL 

i   g^  ^| 

•J3   0 

Form  No.  637. 

BE  FILLED  IN  BY  COLLECTORS.  TO  BE  FILLED  IN  B 

i  Assessment  List 
Page  
.  District  of..  Date  received  .. 

UNITED  STATES  INTERNAL  REVENUE. 
RETURN  OF  ANNUAL  NET  INCOMI 
(Section  38,  Act  of  Congress  approved  August  5, 
MANUFACTURING  CORPORATIONS. 
1TURN  OF  NET  INCOME  received  during  the  Year  ending  Dece 
..  a  corporation,  ti 

V, 

X 

,«». 

3 

j 

>tal  amount  of  paid-up  stock  outstanding  at  close  of  year  
>tal  amount  of  bonded  or  other  indebtedness  outstanding  at  close  o 
?nss  TTcrnMTC  fsfifi  Note  A")  .  . 

DEDUCTIONS. 

>tal  amount  of  all  the  ordinary  and  necessary  expenses  of  maint 
operation  of  the  business  and  properties  of  the  corporation  (see  I 
)  Total  amount  of  losses  sustained  January  1  to  December  31  .... 
)  Total  amount  of  depreciation  January  1  to  December  31  
TOTAL  fsee  Note  B}  .  . 

>tal  amount  of  interest  January  1  to  December  31  on  bonded  or  othe 
indebtedness  to  an  amount  not  to  exceed  amount  of  paid-u 
cam'  tal  a,t  close  of  vear  (s&p.  Notp  R") 

)  Total  taxes  paid  January  1  to  December  31  imposed  under  authoi 
ity  of  the  United  States  or  any  State  or  Territory  thereof  .... 
)  Foreiem  taxes  naid  .  . 

c- 

Q_ 

,! 

<H! 

4 

1 

1 

) 

nount  received  by  way  of  dividends  upon  stock  of  other  corporal 
stock  companies,  associations,  and  insurance  companies  subject  t 
TOTAL  DEDUCTIONS  .  , 

IT  INCOME  .  . 

o  ^ 

*q 

*^  L^I  f—i  r^     t—i     'c'io"     r^.          s$     ^     ^            ^ 

H1^   eo 

&s 

iJS 

•1§  -5 

"•^  r4  ci  co     ^     *o         co         t*             oo           os 

^O 

p 

y 

c3rd$>52__ol,  *_c§.2       2  o 


•gS  — 
llfey 

02    O    03    O 

§£"§•§ 

gpii 

O  °  «  S  S 

S  >>£QQ 

gi-S5S 
g  S  8-"-' 

Mffj? 

•§§*«§ 
§k4?J 


3£; 


ary 


d 
ed 
n, 


asj.lS'g^»-Bs 

mill  isi 

'1 1 sl^s  ^§| 

«    S     QQ     &,   «    ^^C^fl^2 

-S^  §^  8  S  c  P|TS^ 
S-S^Aj  §  ^^^  3 

^^t+^tM          tS    _  «M  *Ai  S   i 


— « J3     t*Ii  ^  •£  ™      •  *>  o,^ 
IS^'o  o  j.go'o^'S 

.  *«  *>  *»  S  ^  T!  a>  .2p  g 


*'ill'8ir»i>8i 

Ud^^o°gowa3><< 

^•iss^i'Ss®^6 


ra 
a 


op 
tal 
tal 


o 
o 


tal 

To 
To 


TL     N 

C  13       a  • 

3  55  -»-=  c^  «4-<  _, 

SI25  L& 

S-83|^| 

^          H     fe 


ij 

^02 

§3 

O  +* 

'•§5 

£+* 

0   « 

a.S. 

s-s 

0  § 

* 

11 

i 

°      §4 

o  a 

1 

o 

| 

li 

r^ 

O 

a>      ! 

JD        ! 

II 

«•§ 

> 

X 

1 

um  is  to 
1 

I* 

'K 

-1-3 

TJ   § 

a 

tD 

>  §* 

F 

^H 

^S'i*  S 

°1 

I1 

^    r/T  ^ 

> 

c 

c. 
^ 

4- 
a 
c 

E 

a> 

>  & 

*    a> 

,  § 
u 

£-ic 

ill 

Q}    O 

< 

fe 

1 

c 
c 
•^ 
I 

? 

il 

5  A 
•    o 

il 

S  ^ 

^3 

>1 

i§ 

.   -»^> 

d  w 

? 

Vr 

2   d 

p 

H- 

•<  (;J- 

3  3 

o  I  %'$  S  I 

.s^llig 
111'8- 


r  himse 
knowle 
every  p 
out  any 
d  that  t 


d 
with 
d  a 


his 
h  an 


ra    Q)    (H  «+-<    i^    LH 

^^'g  0.2  o 
o  ^>  ^  ^>  a>  «+^ 
d  -^  02  d  §  -t-» 

mis: 

^  co  4:  §  >-53 

I  Fs  s  1 1 

O   m    g  ^q    CQ    r-! 

t-o^^ 
rfSpIl 
Ipttfl  « 

g|"g^-J-s    3 

o  &§"3  2-S       o 

RfliJ  - 


I 

1 

2o> 

•§1 


-dTJi^50^^1^^ 
^  S  o  g  g^^  1  w  g 

QJ  03^^.0-^-^  g  >  g 


%% 
<S8 


fl  ^ 

la 

f-(       C3 


corporation,  wh 
or  himself,  deposes  and 
knowledge  and  belief,  a 
every  particular;  that 
hout  any  deduction  wha 
hat  the  net  income  t 


a 
l« 

«&  »H 

2 


CRIBED 


lll^jlflirP 


S  3  °  ° 


<D  ^5^^  a^-^ 

«<-)     ;nP^'±3+a     d     O     C^ 


O5  O     r-,       i.-,     ~ 
rH     rH     OQ  O 


INDEX 

[References  are  to  sections] 
A 

SECTION 

ACT  OF  CONGRESS  LEVYING  CORPORATION 
TAX.  (See  also  CONSTITUTIONALITY  OF  THE  ACT 
OF  CONGRESS.) 

title  of 3 

purpose  of 3 

how  cited  and  referred  to  in  this  book    ...  2 

form  of 2 

discordant  provisions  of,  with  respect  to  what  the 

tax  is  on 5,  9 

when  became  effective 29 

provisions  of,  prescribing  method  of  calculating 

income,  mandatory 32 

whether  retroactive 29,  39 

whether  list  in,  of  deductions  to  be  made  from 

gross  income  is  exhaustive 45 

See    also   DEDUCTIONS  TO   BE  MADE    FROM 

GROSS  INCOME. 
deductions  allowed  by,  from  gross  income, 

See  DEDUCTIONS  TO  BE  MADE  FROM  GROSS  IN- 
COME. 

ACTION.     (See  REMEDIES.) 
ACTION  OF  DEBT 

to  recover  tax,  limitation  of  time  for  instituting      .  113n. 

as  means  of  correcting  erroneous  return        114,  126 

where  no  assessment  has  been  made     114,  122,  126 

may  be  defended  without  first  appealing  to 

Commissioner  of  Internal  Revenue     .       .       137 


242  INDEX. 

[References  are  to  sections] 

SECTION 

ACTION    OF   DEBT—  Continued 

to  collect  an  assessment 126 

APPORTIONMENT 

of  earnings  between  business  transacted  in  United 

States  and  abroad 77 

ASSESSMENT 

to  be  made  by  Commissioner  on  facts  as  stated  in 

return 103,  119,  120,  134 

acquiesced  in  by  government,  presumed  correct    .    113n. 
whether  condition  precedent  to  action  of  debt  to 

recover  tax .       .       114 

necessity  for 114 

nature  of  Commissioner's  duty  in  making    103,  120,  134 

amount  of 121 

time  of 122 

on  original  return      ....     103,  119,  120,  121 
on  corrected  return     ....    119,  120,  121,  122 

notice  of 123,  130 

payment  of 123 

See  also  PAYMENT. 

distinguished  from  collection  .        .       .125,  129,  130 
collection  of, 

See  COLLECTION. 
general  statutes  as  to,  not  applicable  to  this  tax 

125,  129,  130 

mandamus  to  compel 134 

ASSESSMENTS,  SPECIAL.      (See  SPECIAL  ASSESS- 
MENTS.) 
ASSETS 

increase  in  value  of,  not  necessarily  income  .       .  31,  35 

B 
BANKS 

tax  on  deposits  of 40,  40n. 

interest  on  deposits  of,   when  deductible  from 

gross  income 67 


INDEX.  243 

[References  are  to  sections] 

SECTION 

BANKS  —Continued 

what  are       .        . 67n. 

capital  of,  what  is 78n. 

foreign,  not  allowed  to  deduct  interest  on  deposits 

in  excess  of  paid-up  capital          ....         82 
BONDS 

held  by  foreign  company,  when  deemed  capital 

invested  in  United  States 78 

BOOKS 

company  cannot  be  required  to  change  its  mode 

of  keeping 101 

company  not  bound  to  keep 101 

examination  of,  by  revenue  agents  .  .  108,  109 
court  proceedings  to  compel  production  of  .  .  109 

defences  to 110 

costs  of Ill 

general  statute  as  to  production  of,  to  collectors, 

inapplicable 130 

'  BREWERIES 

what   may  be    treated    as   operating    expenses 

of 47n. 

BUSINESS 

taxes  on,  proportioned  to  dividends  and  interest 

on  bonded  debt 4n. 

is  this  tax  laid  on 4-10,  48 

this  tax  not  proportioned  to  amount  of  5,  10,  42,  149 
this  tax  designated  by  Congress  as  a  tax  on  .  .6,  48 
is  income  used  a  mere  measure  of  the  .  7-10,  14,  48 
whether  companies  which  do  no,  are  liable  to  this 

tax 9 

character  of,   classification   of  corporations  with 

respect  to 18 

when  a  corporation  is  engaged  in,  within  United 

States 28 

tax  on,  whether  affected  by  ownership  of  property 

exempt  from  taxation    ......         40 


244  INDEX. 

[References  are  to  sections] 

SECTION 
BUSINESS  —  Continued 

what  is  income  from,  as  distinguished  from  in- 
come from  investments 43 

expenses  of  maintaining  and  operating  .        .        .   46-52 

See  MAINTENANCE  AND  OPERATION. 
what  is  income  from,  transacted  in  United  States  76,  77 

what  is  loss  in  a  given 81n. 

principal  place  of,  return  to  be  made  at         .  89 

tax  on  income  derived  from,  not  a  direct  tax        .       142 
BUSINESS   CORPORATION 

whether  equivalent  to  corporation  organized  for 

profit 17 

whether    educational    corporation    charging    for 

tuition  is 26 

0 

CAPITAL.    (See  also  CAPITAL  STOCK.) 

invested,  income  from       .        .        .      5,  10,  78,  41,  42 
invested  in  United  States,  what  is  income  from    .         78 

employed,  what  is 78n. 

circulating  and  fixed,  distinction  between      .        .  35,  53 

and  surplus,  what  is 43n. 

what  expenses  properly  chargeable  to 

See  DEDUCTIONS  TO  BE  MADE  FROM  GROSS  IN- 
COME. 

income  charges  paid  by,  recoupment  for        .       .         50 
loss  of, 

See  Loss. 
CAPITAL  STOCK 

divided  into  shares,  whether  this  tax  is  on  priv- 
ilege of  having 12 

what  corporations  have 19 

meaning  of 61 

paid-up,  what  is 61 

outstanding,  what  is 63 


INDEX.  245 

[References  are  to  sections] 

SECTION 

CAPITAL    STOCK  —  Continued 

what  return  must  state  in  regard  to       ...         91 
CHARITABLE  CORPORATION 

what  is 18n.,  26 

whether  exempt  from  this  tax          ....         26 
COLLECTION.     (See  also  COLLECTORS.) 

distinguished  from  assessment  .        .        .125,  129,  130 
governed  by  general  internal  revenue  statutes      .       125 

by  distraint,  etc 125 

by  action  of  debt,     (See  ACTION  OF  DEBT.) 
COLLECTORS 

may  extend  time  for  making  return        ...         86 
whether  may  administer  oath  to  return         .         88,  130 

to  receive  returns 89 

to  transmit  returns  to  Commissioner  of  Internal 

Revenue 102 

to  report  to  Commissioner  failure  of  company 

•  to  make  return 104 

duties  of,  in  case  return  submitted  is  imperfect 

on  its  face .       .       105 

to  report  errors  in  return 106 

f         to  serve  notice  of  assessment 123 

to  receive  payment  of  the  tax 123 

directions  to,  by  Secretary  of  Treasury          .        .       128 
not  inquisitorial  officers  in  connection  with  this 

tax 128,  130 

general  duties  of 130 

not  to  divulge  information        .        .        .        .117,  130 
actions  against,  to  recover  back  taxes  paid  under 

protest .        .       137 

COMMISSIONER  OF  INTERNAL  REVENUE 
no  power  to  prepare  return  for  corporation  not  in 

default 29 

regulations  of, 

as  to  liability  to  this  tax  of  corporations 

organized  or  dissolved  within  the  year       .         29 


246  INDEX. 

[References  are  to  sections] 

SECTION 

COMMISSIONER    OF  INTERNAL  REVENUE  — 

Continued 

as  to  meaning  of  gross  income,  criticised        .  3 In. 
as  to  treating  increase  in  value  of  property  as 

income 35 

disregarding  provision  of  law  that  income  is 

not  taxable  unless  received  ....  37 
as  to  taxing  income  from  foreign  business  and 

property 44A 

disregarding  words  "  actually  paid  "  in  the 

statute 49 

as  to  what  companies  must  make  returns      .  87 

extent  of  power  to  make 90 

as  to  contents  of  return     .        .        .               90,  100 

as  to  keeping  of  book  by  corporations    .        .  101 

as  to  submission  of  inventory  .        .        .        .  100 
as  to  appointment  of  internal  revenue  agents 

to  collect  data 106 

powers  of,  s 
may  prescribe  form  of  return  ....  90 
but  not  its  substance  or  contents  .  90,  100,  134 
cannot  compel  company  to  disclose  how  it  ar- 
rives at  data  given  in  return  .  .  .  100 
whether  can  compel  company  to  keep  books  101 
to  keep  returns  in  his  office  .  .  .  102, 116 
to  make  assessment  on  the  returns  103, 119, 120,  134 
ministerial  duty  of,  in  making  assessments 

103,  120,  134 

where  no  return  is  made    ,        .        .        .        .  104 

in  cases  of  returns  imperfect  on  their  face      .  105 

in  cases  of  false  or  erroneous  returns       .   106  et  seq. 

to  institute  proceedings  for  correction  of  return  1 06 

quasi-judicial  function  of  .        .        .        .       106,  134 

delegation  of  powers  by 106 

to  require   additional  information  from  the 

company 90,  100,  107,  134 


INDEX.  247 

[References  are  to  sections] 

SECTION 

COMMISSIONER    OF   INTERNAL    REVENUE  — 

Continued 
to  appoint  revenue  agent  to  examine  books 

and  take  testimony 108 

to   invoke   aid  of    courts   for   inspection  of 

books  and  examination  of  witnesses    .        .       109 
to  make  amended  return  on  information  so 

acquired 112 

assessment  by, 

See  ASSESSMENT. 
application  of  general  internal  revenue  statutes 

asto 129 

to  authorise  institution  of  action  for  recovery  of 

taxes 126n. 

cannot  be  both  loyal  agent  and  impartial  judge   .       132 

mandamus  against 134 

appeal  to,  not  necessary  before  suing  for  illegal 

'        distraint 136 

necessity  for  appeal  to,  before  suing  to  recover 

back  taxes  illegally  exacted 137 

applications  to,  for  refund  of  taxes         .        .        .       138 
COMPANIES.     (See  also  FOREIGN  COMPANIES,  COR- 
PORATIONS.) 

what,  are  liable  to  this  tax 

companies  doing  no  business    .        .        .        .  9 

unincorporated  companies  ....  16 
companies  organized  for  profit  .  .  .  17 
having  capital  represented  by  shares  .  .  19 

insurance  companies 20 

foreign  companies 27,  28 

organized  or  dissolved  within  the  year  .  .  29 
expressly  excepted  classes  of  .  .  .  21-26 

what  are  deemed  "  subject  to  the  tax  "         .72,  73,  87 
whether  the  word  includes  successors     .       .       .       29n. 
returns  by, 
See  RETURNS. 


248  INDEX. 

[References  are  to  sections] 

SECTION 

COMPANIES  —  Continued 

requiring  additional  information  from    .       .       .       107 
right  of,  to  be  heard  as  to  correcting  return  .      107,  112 
CONGRESS.     (See  also  ACT  OF  CONGKESS,  CONSTI- 
TUTIONALITY OF  THE  ACT  OF  CONGRESS.) 
discussion  of  corporation  tax  in       ....  1 

designation  by,  of  what  tax  is  on,  not  conclusive          6 
CONSTITUTIONALITY  OF    THE  ACT    OF  CON- 
GRESS 
with  respect  to  income  from  state  and  municipal 

securities 40,    147 

with  respect  to  income  from  land  .  .  41,  141-144 
with  respect  to  income  from  invested  personal 

property 42,    141-144 

on  account  of  failure  to    provide   for  notice   to 

company 107,  112 

statute  framed  to  obviate  objections  to  .  .  1, 139 
general  statement  of  objections  to  .  .  .  .  140 
whether  void  as  unapportioned  direct  tax 

141, 142, 143, 144 

objection  to,  as  tax  on  a  state  franchise       .        .       145 
objection  to,  on  the  ground  of  inequality      .       .       146 
whether  impaired  by  retroactive  features  of  tax      148 
effect  of  partial  unconstitutionality         .       .       .       149 
CONTEMPT.     (See  COURTS,  BOOKS,  WITNESSES.) 
CONTRACTS 

soliciting  of,  not  necessarily  doing  business   .       .         28 
CORPORATION  TAX  OF  1909.     (See  also  ACT  OP 
CONGRESS  LEVYING  CORPORATION  TAX. 

origin  of 1 

form  of 2 

how  cited  and  referred  to  in  this  book  ...          2 

purpose  of 3 

what  property  or  rights  levied  upon       .        .      4-14,  48 
what  corporations,  companies  or  associations  are 
subject  to 15-29 


INDEX.  249 

[References  are  to  sections] 

SECTION 

CORPORATION    TAX    OF    1909  —  Continued 

companies  doing  no  business     ....  9 

unincorporated  companies         .        .        .        .          16 
corporations  or  companies  not  organized  for 

profit 17 

corporations  or  companies  not  having  capi- 
tal divided  into  shares 19 

insurance  companies 20 

expressly  excepted  classes         ....  21-22 

labor  organizations 26 

agricultural  or  horticultural  organizations     .         23 
fraternal  beneficiary  societies    ....         24 
domestic  building  and  loan  associations         .         25 
religious,  charitable  or   educational  corpora- 
tions          26 

possible  methods  of  evading 19,  72 

what  income  included  in, 
See  INCOME,  DEDUCTIONS    TO  BE    MADE  FROM 

GROSS  INCOME. 

what  is  a  company  "  subject  to  the  tax  "      .        .  72,  73 
assessment  of, 
0  See  ASSESSMENT. 

returns  for, 

See  RETURN. 
action  to  recover, 

See  ACTION  OF  DEBT. 
collection  of, 

See  COLLECTION 
CORPORATIONS.      (See  also  COMPANIES.) 

how  objects  of,  determined  for  purposes  of  tax  law  18 
not  organized  for  profit,  whether  subject  to  this  tax  17 
not  having  capital  stock  represented  by  shares  .  19 

expressly  excepted  classes  of 21-26 

foreign,  when  subject  to  this  tax     ....         28 
organized  or  dissolved  within  the  year,  whether 
subject  to  tax 29 


250  INDEX. 

[References  are  to  sections] 

SECTION 

COSTS 

of  proceedings  for  correction  of  return    .        .        .       Ill 
COURTS 

federal,  follow  state  courts  as  to  meaning  of  doing 

business  in  state  statutes 28 

jurisdiction  of,  to  compel  attendance  of  witnesses 

and  production  of  books  for  correcting  return  109 
no  direct  appeal  to,  from  assessment  of  tax  .  .  132 
remedies  in, 

See  REMEDIES. 


DEBT,  ACTION  OF.    (See  ACTION  OF  DEBT.) 
DEBTS.     (See  also  INDEBTEDNESS.) 

whether  expenses  of  collecting,  deductible  from 

gross  income 47n. 

DEDUCTIONS  TO  BE  MADE  FROM  GROSS  IN- 
COME 

whether  statutory  list  of,  is  exhaustive  45,  58,  65,  66,  99A 
what  proper  on  general  principles  45,  46,  53,  58,  63n.,  66 
expressly  required  by  the  Act  of  Congress  46-74,  80-84 
expenses  of  maintenance  and  operation  46-52,  80,  96 

See  MAINTENANCE  AND  OPERATION. 
for  charges  such  as  rentals  or  franchise  payments         52 
for  losses 53-59,  81 

See  Loss, 
by  insurance  companies 58-59 

See  INSURANCE  COMPANIES. 
for  interest  paid  on  indebtedness     .        .      60-65,  67,  82 

See  also  INTEREST,  INDEBTEDNESS. 
for  principal  of  debts  of  company  paid  ...         66 
for  additions  to  sinking  funds           ....         66 
by  banks  and  trust  companies         .        .        .        .  67, 82 
for  taxes 68-70,  83 

See  also  TAXES. 


INDEX.  251 

{References  are  to  sections] 

SECTION 

DEDUCTIONS    TO    BE    MADE    FROM    GROSS 

INCOME  —  Continued 

for  dividends  on  shares  in  other  companies      71-74,  84 
See  also  DIVIDENDS. 

by  foreign  companies 79-84 

See  also  FOKEIGN  COMPANIES. 

return  must  state  amount  claimed  as  ...         95 
DEPOSITS.     (See  BANKS.) 

with  state   officers,  whether  capital  within  the 

state 78 

DEPRECIATION 

occurring  prior  to  1909,  whether  expense  of  making 

good  may  be  deducted  from  gross  income          .         51 
deduction  for,  dependent  solely  on  express  statute         53 

of  investments 53n. 

what  allowances  may  be  made  for  ....         57 
occurring  in  previous  years,  whether  to  be  allowed 

for 51,57 

of  property  of  foreign  companies     ....         81 
amount  claimed  as,  to  be  stated  separately  in 

*  return 97 

DIRECT  TAX 

whether  an  income  tax  is 141 

tax  on  income  from  particular  business  is  not     .       142 
whether  present  tax  is  within  this  principle       143 
whether  tax  on  income  of  certain  classes  of  persons 

is 144 

DISTRAINT 

for  tax  in  arrear 125 

remedies  against  illegal 136 

DIVIDENDS 

this  tax  not  a  tax  on      ......         13 

may  be  payable  though  no  income  received       .    .     31 
on  stock  held  in  other  companies,  whether  amount 

to  income 34 

whether  amount  to  income  from  business      .         43 


252  INDEX. 

[References  are  to  sections] 

SECTION 
DIVIDENDS  —  Continued 

taxes  on  right  to  exist  as  corporation  proportioned 

to  amount  of 40 

what  are 74 

on  shares  held  in  other  companies  subject  to  the 

tax,  deductions  from  gross  income  for  .  .  71-74 
construction  of  the  provision  in  general  .  71 
on  shares  in  companies  whose  net  income  is 

less  than  five  thousand  dollars     ...         72 
on  shares  in  foreign  companies         ...         73 
what  are  deemed  "  dividends"         ...         74 
on  shares  held  by  foreign  companies,  when  to  be 

deducted  in  ascertaining  their  taxable  income     .         84 
received  on  shares  in  other  companies,  what  return 
must  state  in  regard  to 94 

E 

EDUCATIONAL   CORPORATIONS 

what  are 26 

exempt  from  this  tax 26 

EVASION 

of  the  tax,  possible  modes  of 19,  72 

EXEMPTIONS  FROM  TAXATION 

what  included  in 40,  43 


FOREIGN  BUSINESS  AND  PROPERTY 

income  of  domestic  company  from,  whether  tax- 
able    44A 

FOREIGN  COMPANIES 

not  doing  business,  not  liable  to  this  tax       .        .  9 

what  are 27 

what  deemed  to  be  engaged  in  business  in  the 

United  States  .  28 


INDEX.  253 

[References  are  to  sections] 

SECTION 

FOREIGN   COMPANIES—  Continued 

ceasing  to  do  business  in  United  States  prior  to 

passage  of  act 29 

income  of,  not  taxable  because  stock  owned  by 

domestic  company  .......         34 

dividends  on  shares  in,  when  deductible  from  gross 

income  of  domestic  companies     ....         73 

how  taxable  income  of,  calculated  ....  75-84 

what  is  income  from  American  business  of  .  .  76,  77 
what  is  income  of,  from  capital  invested  in  United 

States 78 

deductions  by,  from  gross  income  ....  79-84 
expenses  of,  for  maintenance  and  operation  .  .  80 
losses  by,  when  deductible  from  gross  income  .  81 
interest  on  indebtedness  of,  when  deductible  from 

gross  income 82 

%  taxes  paid  by,  when  may  be  deducted  from  gross 

income 83 

dividends   on   shares  held   by,  in    other  compa- 
nies     84 

what  returns  by,  should  state  in  regard  to  main- 
tenance and  operation 96 

in  regard  to  losses 97 

in  regard  to  indebtedness  and  interest    .        .  92,  98 
returns  by,  in  general, 

See  RETURNS. 
FRANCHISE 

so-called  tax  on,  as  tax  on  business        .       .       .     4, 11 

to  be  a  corporation,  this  tax  not  on       .       .         11,  145 

taxes  on,  proportioned  to  amount  of  dividends        40 

taxes  on,  proportioned  to  income    .       .        .      40n. 

whether  tax  on,  is  a  tax  on  property      .        .        .      lln. 

whether  this  tax  unconstitutional  as  a  tax  on  a, 

granted  by  state 145 

FRANCHISE  PAYMENTS 

deductions  for,  from  gross  income  ....        52 


254  INDEX. 

[References  are  to  sections] 

G 

GOODWILL 
tax  on  . 


I 

IMPROVEMENTS 

whether  expenses  of,  deductible  from  gross  in- 
come          47 

INCOME  (See  also  INCOME  TAX.) 

this  tax  proportioned  to 10 

whether  a  mere  measure  of  the  value  of  the  busi- 
ness     7-10,  14 

how  calculated  for  purposes  of  this  tax          .        30-84A 

definition  of .         33 

distinguished  from  profits 31 

increase  in  value  of  assets  not  taxable  as       .        .  31,  35 
cannot  be  calculated  by  balance-sheet  method  of 

estimating  profits  available  for  dividends    .        .         31 
gross, 

whether  equivalent  to  gross  profits         .        .         31 

what  is,  in  general 33 

statutory  provisions  as  to  method  of  calculating, 

mandatory 32 

rental  value  of  property  occupied   by  company 

not 33 

money  described  as  capital  in  remittance  to  com- 
pany, may  be 33 

dividends  on  stock  of  other  companies  as      .  34 

of  other  companies  in  which  taxpaying  company 

owns  shares,  whether  taxable      ....         34 
what  is,  in  case  of  sale  of  property  by  company       .  35,  36 

received,  what  is 37 

as  trustee,  whether  taxable 38 

received  before  passage  of  act,  whether  taxable      .         39 
derived   from   property   exempt   from   taxation, 

whether  taxable 40 


INDEX.  255 

[References  are  to  sections] 

SECTION 

INCOME  —  Continued 

taxes  on  right  to  exist  as  a  corporation  propor- 
tioned to 40n. 

from  contracts  with  state,  whether  taxable  .        .         40 

from  land 41 

from  invested  personal  property      ....         42 
from  business  as  distinguished  from  investments, 

what  is  43 

from  ultra  vires  business    .        .        .  .  '     .         44 

from  foreign  business  and  property         .        .        .      44A 
deductions  from  gross,  in  order  to  ascertain  net, 

See  DEDUCTIONS  TO  BE  MADE  FBOM  GROSS  INCOME. 
"  paid  out  of  "  when  expenses  deemed  to  be       49n.,  50 
of  insurance  companies,  how  estimated  .        .        .58,  59 
of  foreign  companies,  how  calculated  for  purposes 

of  tax 75-84 

See  FOREIGN  COMPANIES. 
for  what  period  calculated  for  purposes  of  tax      .       84A 

net,  to  be  stated  in  return 99A 

INCOME  TAX 

corporation  tax  as  substitute  for     .        .        .        .   1, 139 

»    whether  this  tax  amounts  to     .        .        .        .      4—10,   14 

difference  between  this  tax  and  an  ....         14 

whether  constitutional       .        .        .        .40,  41,  42,  141 

INDEBTEDNESS 

bonded,  or  other,  what  is 60 

interest  paid  on,  deduction  for,  from  gross  income 

60-65,  67,  82 

See  also  INTEREST. 
limitation  of  amount  of,  on  which  interest  paid 

may  be  deducted  from  gross  income  .     61,  62,  63,  82 

of  non-stock  corporations 64 

in  excess  of  paid-up  capital  stock    outstanding, 

what  is 61-64 

payment  of  principal   of,   deductions  for,   from 

gross  income 66 


256  INDEX. 

[References  are  to  sections] 

SECTION 
INDEBTEDNESS  —  Continued 

of  foreign  companies,  deductions  on  account  of     .         82 
what  return  must  state  in  regard  to         ...  92,  98 
INEQUALITY 

in  the  operation  of  this  tax        .        .     8,  38,  71,  72,  146 
INHERITANCE  TAX 

not  a  tax  on  the  property  inherited       .        .        .       4n. 
proportioned  to  value  of  exempt  property     .       .         40 
INJUNCTION 

against  illegal  tax 133 

against  giving  information  unnecessarily       .       .       133 
INSURANCE 

whether  premiums  paid  for,  are  deductible  from 

gross  income 47 

when  premiums  for,  deemed  actually  paid     .        .         49 
losses  not  compensated  by        ...        .        .  56 

INSURANCE  COMPANIES 

effect  of  making  all,  subject  to  this  tax     ...         20 

what  are 20 

when  deemed  to  be  doing  business  in  a  state        .         28 
losses  by,  what  to  be  deducted  from  gross  income         58 
deductions  by,  from  gross   income,  for  amounts 
other  than  dividends  paid  on  policy  or  annuity 

contracts 58 

for  additions  to  reserve  funds  ....  59 
how  income  of,  to  be  estimated  ....  58,  59 
whether  deduction  may  be  made  for  unearned 

premiums -58 

mutual,  interest  on  indebtedness  of        ...         64 
returns  by,  need  not  state  amount  of  capital 

stock 91 

bonds  deposited  by,  with  state  officer  as  capital 

within  the  state 78 

foreign,  deductions  allowed  by,  from  gross  income        81 
special  allowances  claimed  by,  to  be  stated  sepa- 
rately in  the  return 97 


INDEX.  257 

[References  are  to  sections] 

SECTION 
INSPECTION 

of  books.    (See  BOOKS.) 

of  returns 116 

INTEREST.     (See  also  INDEBTEDNESS.) 

on  bonded   or  other  indebtedness,   when  to  be 

deducted  from  gross  income  .  .  60-65,  67,  82 
on  indebtedness  in  excess  of  paid-up  capital  stock  65 
on  indebtedness  of  non-stock  corporations  .  .  64 
on  indebtedness  of  foreign  companies  ...  82 

on  amount  of  assessment 123 

recoverable    in   actions   to  recover  back  illegal 

tax 137 

INTERNAL  REVENUE  LAWS 

application  of,  to  returns 118 

to  collection  of  the  tax 125 

to  assessment  of  the  tax  .  .  .125,  129,  130 
»  to  the  corporation  tax  in  general  .  .  .  127 
as  to  the  powers  of  Secretary  of  the  Treasury  .  128 
as  to  the  powers  of  Commissioner  of  Internal 

Revenue 129 

»   as  to  collectors 130 

applicability  of,  to  remedies  against  illegal  as- 
sessment   132 

INVENTORY 

whether  company  compellable  to  submit       .        .       100 
INVESTMENTS 

income  from,  whether  included  in  the  tax        .        .   10,  42 
acquisition  of  property  as,  not  doing  business     .         28 
what  is  income  from,  as  distinguished  from  in- 
come from  business 43 

within  United  States,  what  is  income  from  .       .         78 

L 
LAND 

income  from,  whether  taxable          .       .       .       .         41 
LEGACY  TAX.     (See  INHERITANCE  TAX.) 


258  INDEX. 

[References  are  to  sections] 

SECTION 
LIMITATIONS 

for  supplying  or  correcting  return  .  .  .  .  113 
as  bar  to  action  to  recover  tax  .  .  .  122,  126 
against  suit  to  recover  back  taxes  paid  under 

protest 137 

against    appeal    to    Commissioner    of    Internal 

Revenue  for  refund 137,  138 

LOSS 

income  charges  borne  by  capital  as  ...  50 
whether  damages  paid  for  torts  are  a  .  .  47 

whether   proper   to   allow   for,    without   express 

provision 53 

by  payment  of  bonds  purchased  at  premium  .  53n. 
by  depreciation  of  investments  .  .  53n.,  57,  81 

See  also  DEPRECIATION. 

by  embezzlement 53n.,  54 

of  circulating  capital 53 

meaning  of 54 

by  insolvency  of  debtors   ......         54 

must  be  sustained  within  the  year  ...  55 
must  be  not  compensated  by  insurance  or  otherwise  56 
by  foreign  companies,  when  deductible  from  gross 

income 81 

what  returns  must  state  in  regard  to  ...  97 
burden  of  proving 126 

M 

MAINTENANCE  AND  OPERATION 

expenses  of,  to  be  deducted  from  gross  income  .  46 
what  are  expenses  of,  in  general  ....  47 
during  previous  years,  whether  deductible  .  .  47,  96 
of  property  as  distinguished  from  business  .  48,  80,  96 
expenses  of,  must  be  actually  paid  in  order  to  be 

deducted 49 

when  expenses  deemed  to  be  paid  "  out  of  in- 
come " 49n.,  50 


INDEX.  259 

[References  are  to  sections] 

SECTION 

MAINTENANCE   AND    OPERATION  —  Continued 

what  are  "  ordinary  and  necessary  expenses  of  "        51 
payments  in  nature  of  rentals  or  franchise  pay- 
ments         -     .  52 

payment  of  losses  as  part  of  expenses  of  58 

payment  of  indebtedness  as  part  of  expense  of  .  60,  66 
contributions  to  sinking  fund  as  expense  of  .  66 
whether  expenses  of,  include  ordinary  taxes  im- 
posed by  foreign  government  ....  70 
of  foreign  companies,  what  expenses  deductible  as  80 
what  return  must  state  in  regard  to  ...  96 

MANDAMUS 

as   remedy   against   illegal   proceedings   in   con- 
nection with  tax 134 

MUNICIPAL  SECURITIES 

whether  income  derived  from,  is  taxable       .       .        40 

N 
NAME 

not  conclusive  as  to  nature  of  tax  ....          6 

NOTICE 

of    proceedings    to    supply    or    correct    return, 

whether  necessary  .        .        .        .        .        .       107,  112 

of  assessment       .......      123,  130 

O 
OATH 

to  return,  who  shall  make 88 

by  whom  to  be  administered    .        .       .        88,  130 

form  of 88 

OBJECTS 

of  corporations  or  companies,  how  determined     .         18 
subject  to  tax,  none  under  this  law         .        .        .       130 
OPERATION.     (See  MAINTENANCE  AND  OPERATION.) 
ORIGIN 

of  the  corporation  tax  of  1909         ....          1 


260  INDEX. 

[References  are  to  sections] 

SECTION 

P 
PAYMENT 

of  the  tax,  when  to  be  made 123 

penalties  for  failure  to  make 123 

to  whom  to  be  made 123 

under  protest 124,  137 

enforcement  of, 

See  COLLECTION. 
PERSONAL  PROPERTY 

invested,  whether  income  from,  is  taxable     .       .         42 
PHILIPPINE  ISLANDS 

whether  corporation  organized  under  laws  of,  are 

subject  to  this  tax 27 

PORTO  RICO 

whether  corporations  organized  under  laws  of,  are 

subject  to  this  tax 27 

PREMIUM.     (See  INSUBANCE.) 

paid   for  lease,   whether  deductible  from  gross 

income 52n. 

PRESIDENT 

may  authorise  disclosure  of  company's  secrets     .       117 
PROFITS.     (See  also  INCOME.) 

burden  of  proving 126 

PROPERTY.    (See  also  LAND,  PERSONAL  PROPERTY, 

INCOME.) 
when  taxes  proportioned  to  value  of,  not  taxes 

on 4 

ownership  or  acquisition  of,  in  state,  not  doing 

business 28 

increase  in  value  of,  not  income       .       .       .       .  31,  35 
sales  of,  what  amounts  to  income  in  cases  of       .  35,  36 

expense  of  maintaining 48,  80,  96 

See  MAINTENANCE  AND  OPERATION. 
depreciation  of, 

See  DEPRECIATION. 
sale  of,  for  non-payment  of  tax       .       .       .       .      125 


INDEX.  261 

[References  are  to  sections] 

SECTION 

PUBLICITY 

of  returns 116 

provision  to  guard  against 117 

R 
RAILWAYS 

when  not  doing  business  in  state     ....         28 

exemptions  of,  from  taxation 43 

REGULATIONS.     (See  COMMISSIONER  OP  INTERNAL 

REVENUE,  SECRETARY  OF  THE  TREASURY.) 
RELIGIOUS  CORPORATIONS 

what  are 26 

exempt  from  this  tax 26 

REMEDIES 

for  collection  of  tax, 

See  COLLECTION. 
against  illegal  tax  or  assessment      .       .       .       132-138 

by  injunction 133 

by  mandamus,  etc 134 

by  passive  resistance  .  .  .  .  .  135 
by  trover  or  trespass  in  case  of  illegal  distraint  136 
by  action  to  recover  back  taxes  paid  under 

protest 137 

by  application  to  Commissioner  of  Internal 

Revenue 138 

RENTAL  VALUE 

of  premises  occupied  by  company,  whether  part 

of  gross  income 33 

of  part  of  banking  house  occupied  by  manager, 

whether  deductible  from  gross  income        .       .        47 
RENTALS 

deductions  for  payments  such  as     ....         52 
RESERVE  FUNDS.     (See  also  SINKING  FUND.) 

additions  to,  whether  deductible  from  gross  income        59 
RETURN 

importance  of 85 


262  INDEX. 

[References  are  to  sections] 

SECTION 

RETURN  — •  Continued 

when  to  be  made 86 

by  what  companies  to  be  made        ....         87 
by  whom  and  how  to  be  sworn  to   ....         88 

to  whom  to  be  made 89 

control  of   Commissioner    of    Internal   Revenue 

over 90 

what  it  must  contain 91-101 

statement  as  to  capital  stock    .       .       .       .         91 
amount  of  indebtedness     ....         92 

gross  income 93 

dividends  received  from  companies  subject 

to  tax  94 

statement  as  to  maintenance  and  operation  .         96 
as  to  losses  and  depreciation     ....         97 

as  to  interest  paid 98 

as  to  taxes   ........         99 

net  income 99A 

may  contain  additional  statements         .        .        .       100 
duty  of  company  where  cannot  state  details  of, 

accurately 101 

guessing  at  data  stated  in 101 

disposition  of 102,  116 

assessment  to  be  made  on  facts  as  stated  in 

103,  119,  120,  134 
failure  to  make,  consequences  of      .        .        .      104,  121 

imperfect  on  its  face,  effect  of 105 

correcting  an  erroneous  return         .        .        .       106-114 
necessity   for   evidence   of  its  incorrectness 
before    instituting     proceeding     for    cor- 
rection       106,  110,  134 

preliminary  proceeding  before  Commissioner       106 
requiring   additional   information   from   the 

company 107 

examining  books  and  taking  testimony 

108, 109,  110,  111 


INDEX.  263 

[References  are  to  sections] 

SECTION 

RETURN  —  Continued 

action  of  Commissioner  on  information  so 

acquired    .        .        .        .        .        .        .        .       112 

limitation  as  to  time 113 

penalty  for  erroneous 115,  121 

as  public  record          . 116 

not  affected  by  other  internal  revenue  laws  .        .       118 
distinction     between     honestly     erroneous     and 

fraudulent  returns 115,  121 

assessment  on, 
See  ASSESSMENT. 

general  statutes  as  to 130 

REVENUE  AGENTS 

specially  designated  to  examine  books  and  take 
testimony 106,  108 

* 

S 
SALARIES 

money  paid  in  commutation  of,  whether  deduc- 
tible from  gross  income 47 

SALE 

of  assets  by  corporation,  what  is  income  in  cases 

of       .  35, 36 

for  non-payment  of  tax 125 

SEARCHES 

by  collectors,  not  authorized  with  respect  to  this 

tax 130 

SECRETARY  OF  THE  TREASURY 

validity  of  regulations  of 90n.,  128 

no  power  to  add  to  statutory  requirements  as  to 

contents  of  return 100 

powers  of,  in  general 128 

SHAREHOLDER 

suit  by  to  enjoin  company  from  paying  illegal  tax       133 
to  enjoin  company  from  giving  unnecessary 

information  to  collectors  133 


264  INDEX. 

[References  are  to  sections] 

SECTION 

SHARES 

stock  not  divided  into 19 

whether  this  tax  is  on  privilege  of  having     .       .         12 
taxes  on,  proportioned  to  value  of  exempt  prop- 
erty owned  by  corporation 40 

issued  at  a  discount,  whether  to  be  included  in 

estimating  amount  of  capital  stock  outstanding        61 

watered 61 

outstanding,  what  are 63 

whether  taxes  on,  may  be  deducted  from  gross 

income  of  company 68 

SINKING  FUNDS.    (See  also  RESERVE  FUNDS.) 

money  added  to,  whether  deductible  from  gross 

income 66 

SPECIAL  ASSESSMENTS 

whether  deductible  from  gross  income  as  taxes    .         69 
STATE  SECURITIES 

whether  income  derived  from  is  taxable         .     * .        ,40 
STATUTES.    (See  TABLE  OF  FEDERAL  STATUTES  CITED.) 
STOCK.    (See  CAPITAL  STOCK,  SHARES.) 
SUBPOENA  DUCES  TECUM 

from  state  court,  disobedience  of,  by  collectors  .    128n. 
to  compel  production  of  documents  for  correction 
of  return 108,  109 

T 

TARIFF 

corporation  tax  as  amendment  to  tariff  Act  .       1,  2, 139 
TAX.     (See  CORPORATION  TAX,  ACT   OF  CONGRESS 
LEVYING  CORPORATION  TAX,  SHARES.) 

how  to  determine  what  property  or  rights  tax  is  on      4,  6 

remedies  against  illegal, 
See  REMEDIES. 

direct,  what  is     .       .       .   •    .       .      141,142,143,144 
TAXES 

when  to  be  deducted  from  gross  income      .       .  68-70 


INDEX.  265 

[References  are  to  sections] 

SECTION 

TAXES  —  Continued 

must  be  paid  within  the  year  ....         68 

whether  must  be  assessed  against  the  company         68 

assessed  against  company  as  trustee       .        .         68 

special  assessments  for  betterments         .       .         69 

imposed  by  foreign  governments     ...         70 

in  case  of  foreign  companies     .        .  .         83 

what  returns  must  state  in  regard  to      ...         99 

TESTIMONY 

on  preliminary  proceeding  before  Commissioner  to 

show  falsity  of  return 106 

of  officers  and  employees  of  the  company,  to 

correct  return 108 

TIME 

for  making  return 86 

for  correcting  return 113 

r  for  supplying  return 113 

for  assessment 122 

for  notice  of  assessment     .        .        .        .        .        .       123 

for  suit  to  recover  back  taxes  paid  under  protest     .       137 
for  appealing  to  Commissioner  of  Internal  Revenue 

for  refund  of  taxes 137,  138 

TITLE 

of  act  levying  corporation  tax         ....          3 
how  far  to  be  considered  in  construction  of  statute          3 
TORTS 

whether  damages  paid  for,  are  deductible  from 

gross  income 47 

TRUSTEE 

income  received  as,  whether  taxable       ...         38 
taxes  paid  by  company  as,  whether  deductible 

from  gross  income 68 

U 

ULTRA  VIRES  BUSINESS 

whether  income  from,  taxable         ....        44 


266  INDEX. 

[References  are  to  sections) 

SECTION 
UNIFORMITY.    (See  also  INEQUALITY.) 

whether  this  tax  violates  constitutional  require- 
ment of     . 146 

UNINCORPORATED  COMPANIES 

whether  liable  to  this  tax 16 

UNITED  STATES 

action  against,  to  recover  back  taxes  paid  under 

protest 137 

to  recover  amount  ordered  refunded  by  Com- 
missioner of  Internal  Revenue     .       .       .       138 
meaning  of 27 

W 

WITNESSES 

at  preliminary  proceeding  before  Commissioner  to 

show  incorrectness  in  return         .        .        .       .       106 
who  may  be,  on  proceedings  for  correction  of 

return       .  108 

compelling  attendance  of  .       .       .       .       109,  110,  111 
WORDS  AND  PHRASES  EXPLAINED  OR  COM- 
MENTED UPON 

actually  paid 49,60,67 

agricultural  or  horticultural  associations        .       .         23 

annually 84A 

applicable 127 

articles  or  objects  subject  to  tax      .        .       .       .       130 
ascertained  as  provided  in  the  foregoing  para- 
graphs        45 

assessments  thereon 103,  132 

associations          . 16, 29n. 

at  any  time  within  three  years         .        .        .        .       113 
bearing  upon  matters  required  to  be  included  in 

the  return 108 

bonded  or  other  indebtedness 60 

building  and  loan  associations         ....         25 
business  4,  21,  76 


INDEX.  267 

[References  are  to  sections] 

SECTION 

WORDS    AND   PHRASES— -Continued 

business  conducted 81 

business  transacted  within  the  United  States       .         76 

capital  and  surplus 43n. 

capital  invested 10, 78 

capital  stock 61 

capital  stock  represented  by  shares         .        .       .         19 
charges  such  as  rentals  or  franchise  payments  .  52,  70 

close  of  the  year 62,  84An. 

collection,  remission  and  refund  of  internal  revenue 

taxes 127 

companies 16,  29n. 

compensated  by  insurance  or  otherwise         .        .         56 
corporation,  joint  stock  company  or  association  .     16n. 

corporations 16n. 

domestic 25 

clue 123 

during  such  year 84A 

earnings        .  .       .       .       .       .        31n.,  33, 50. 

encourage  the  industries  of  the  United  States     .  3 

engaged  in  business  in  the  United  States       .       .         28 

equivalent  to 6 

evidence .       .       .       106 

exercises  a  trade         .  28 

extended  and  made  applicable         .       .       .       .       127 

false  or  fraudulent 115,  121 

foreign  country 27 

form 90 

franchise 4,  11 

franchise  payments 52 

fraternal  beneficiary  societies 24 

from  all  sources 5,  10,  42,  44A,  93 

gross  income 31n.,  76, 93 

income 31,  50 

insurance 56,  58 

insurance  companies 20,  58 


268  INDEX. 

[References  are  to  sections] 

SECTION 
WORDS   AND   PHRASES  — Continual 

interest  of  money 43n. 

labor  organizations 22 

loss 47,  50,  54 

maintenance  and  operation 47 

may 107 

necessary  expenses     . 51 

net  income 45 

not  compensated  by  insurance  or  otherwise  .       .         56 

now  or  hereafter  organized 29 

objects  liable  to  tax 130 

officers  and  employees 108 

operation 47 

ordinary  and  necessary  expenses     ....         51 
organized  and  operated     .       .       .       .       .       .         18 

organized  for  profit 17,  20,  26 

other  officer  or  employee  of  the  United  States     .       117 

otherwise 56 

out  of  earnings    .        .        .        .        .        .         49n.,  50, 80 

out  of  income 50 

outstanding 63 

paid 49,60,67 

paid-up  capital  stock 61 

person  .  130n. 

principal  place  of  business 89 

profit 17 

profits  17n.,  20n.,  30 

properties 48 

property 48,  96 

received 37,  76 

religious,  charitable  or  educational  purposes         .         26 

remission  and  refund 127 

rentals  or  franchise  payments 52 

required  by  law 59 

so  far  as  applicable  to  and  not  inconsistent  with       127 
subject  to  the  tax  hereby  imposed  .       .       .72,  73,  87 


INDEX.  269 

[References  are  to  sections] 

SECTION 

WORDS   AND    PHRASES  —  Continued 

sustained  within  the  year 55 

taxes 68,  69 

territories 27 

true  and  accurate  return 101 

United  States  and  its  territories  ....  27 
upon  the  information  so  acquired  .  .  .  .  112 
with  intent  to  defeat  or  avoid  the  assessment  115,  121 
with  respect  to  the  carrying  on  or  doing  business 

5,  6,  38,  48,  149 

within  the  year 84A,  96 

year 55, 84A 

Y 

YEAR 

for  which  tax  is  assessed 84A 


34 


JD 


236362 


H- 


